PAGENO="0001" DEPOSITORY TYA BONDED INDEBTEDNESS CEILING (I HEARING BEFORE THE COMMITTEE ON THE BUDGET UNITED STATES SENATE NINETY-SIXTH CONGRESS FIRST SESSION KNOXVILLE, PENN. FEBRUARY 15, 1979 JUNE 21, 1979 45-720 ~ 3 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 1979 fr~ ~" ( 11 ~c~BS zs~ PAGENO="0002" COMMITTEE ON THE BUDGET EDMUND S. MUSKIE, Maine, Chairman WARREN G.'MAGNUSON, Washington HENRY BELLMON, Oklahoma ERNEST F. HOLLINGS, South Carolina PWI~EY. DOMENICI, New Mexico LAWTON CHILIES, Florida BOB PACKWOOD, Oregon JOSEPH H, BIDEN, Ja., Delaware WILLIAM LI. ARMSTRONG, Colorado J. BENNETT JOHNSTON, Louisiana NANCY LANDON KASSEBAUM, Kansas JIM SASSER, Tennessee RUDY BOSCHWITZ, Minnesota GARY HART, Colorado ORRIN G. HATCH, Utah HOWARD M. METZENEAUM, Ohio LARRY PRESSLER, South Dakota DONALD W. RIEGLE, Ja., Michigan DANIEL P4TRICK MOYNIHAN, New York J. JAMES I3IXON, Nebraska Jona T. McEvor, Staff Director ROBERT S. Born, Minority Staff Director W. THOMAS F0xwELL, Director of Publication8 (II) PAGENO="0003" CONTENTS Page Opening statement of Senator Sasser ` 1 WITNESSES Bohm, Robert A., Department of Finance, and associate director, Environ- ment Center, University of Tennessee 20 Prepared statement of Mr. Bohm 24 Carismith, Roger S., Oak Ridge National Laboratory, Oak Ridge, Tenn~ 41 Prepared statement of Mr. Carismith 43 Chandler, William, University of Tennessee Environment Center 49 Collier, John, board member, Cainey Fork Co-Op 88 Freeman, David S., Chairman, Board of Directors, TVA 53 Gibbons, John H., University of Tennessee 46 Goolsby, William C., associate professor of finance and director, Tennessee Econometric Model, University of Tennessee 30 Prepared statement of Mr. Goolsby 33 Hemphill, Robert S., Jr., Director, Division of Energy Conservation, TVA 55 Prepared statement of Mr. Heinphill 57 Hirst, Eric, Energy Division, Oak' Ridge National Laboratory, Oak Ridge, Tenn 15 Prepared statement of Mr. E[irst 17 Milrainey, 1-lugh, general manager, Cainey Fork Co~Op 87 Moore, John, professor of economics, University of Tennessee - 15 Parris, Hugh G., Manager of Power, TVA 61 Prepared statement of Mr. Parris 65 Peach, J. Dexter, Director, Energy and Minerals Division, General Ac- counting Office; accompanied by John Clark, Atlanta Regional Office; Mitch Williamson, Washington Office; John Brown, WashingtOn Office; and Coy Balew, Atlanta Regional Office, all from GAO 4 Usry, George H., general manager, Athens, Tennessee Tjtilities Board and chairman of the Power Supply Committee of the Tennessee Valley Public Power Association; accompanied by John Collier, board member, Cainey Fork, Co-Op; Hugh Milrainey, general manager, Cainey Fork Co-Op; and Jerry Campbell, executive director, Tennessee Valley Public Power Association 82 Prepared statement of Mr. Usry 85 Skelton, Will, Tennessee Chapter, the Sierra Club 97 Prepared statement of Mr. Skelton 100 Spitzer, Ed, Tennessee Energy Authority 50 Thomas, John Z. C., East Tennessee Energy Group; accompanied by Bob Allen, East Tennessee Energy Group 94 Wilson, Charles H., Tennessee Valley Energy Coalition and the National Council of Senior Citizens, accompanied by Louise Gonfree Gonslow, and Rev. Bill Troy 89 (III) PAGENO="0004" Iv SUPPLEMENTAL MATERIAL Written questions and the responses: Page Senator Sasser to GAO 103 Senator Sasser to TVA - 105 Biographical sketches: Panel on Regional Economic Growth and Electricity Demand 119 Court orders: Order delaying consent decree and requiring environmental impact statement on TVA/EPA agreement 76 Analysis of the TVA sulphur dioxide compliance cost figures and the GAO report~ 72 Letters: Bosworth, Barry P., Director, Council on Wage and Price Stability, regarding pending action of the TVA Board on the proposed settle- ment with EPA 76 From TVA making statement on actions taken by TVA on recom- mendations to TVA in the GAO report 113 GAO projections and peak demand for TVA service area 10 Papers: "Load Forecasts," by Lynn C. Maxwell, Assistant Chief, Analysis Branch, TVA 120 Statements: Tennessee Valley Inter-League Council, League of Women Voters, Nashville, Tenn - 112 ~f'elegrams: From Electric Power Board of Nashville - 113 Index 137 PAGENO="0005" TVA BONDED INDEBTEDNESS CEILING PE]3RUARY 15, 1979 U.S. SENATE, COMMITTEE ON THE BtDGET, Knoxville, Tenn. rfhe committee met in the Supreme Court Building of the State of Tennessee, Hon. James B. Sasser presiding. Senator SASSER. Hearings of the Senate Budget Committee will come to order. OPENING STATEMENT OP SENATOR SASSER Senator SASSER. I've been asked to make some announcements this morning by the State court~, one of which is no smoking; so we would ask everyone to please refrain from smoking this morning. I want to express my appreciation publicly to Judge Parrot and to the State court of appeals for allowing us the use of their facilities this morning. I might say that this hearing is held in connection with the delib- erations of the Budget Committee of the U.S. Senate. We're making a concerted effort in the Congress and in the Senate Budget Com- inittee this year to get a strong handle on a Federal budget, and on Federal spending. REMOVAL OF PITA'S BONDED INDEBTEDNESS CEILING In 1976, the Tennessee Valley Authority came before the Congress to get the bonded indebtedness ceiling lifted at that time. Now, there was considerable controversy in the Budget Committee of both the House and the Senate as to whether TVA's bonded indebtedness ceil- ing should be lifted in 1976. By holding these hearings today, we're getting the information necessary for the Senate Budget Committee and hopefully, for our colleagues on the House side. So, we're here under the auspices of the Senate Budget Committee and under the auspices of our chairman, Senator Edmund Muskie, of Maine. ELECTRIC ENERGY OPTIONS OF TVA Last November 29, the General Accounting Office issued a report entitled, and I quote, "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority." Now, this document repre- sented the first major review of TVA's power program by the Gen- eral Accounting Office in over 19 years. It was a comprehensive doe- ument which detailed many options available to the TVA, and these (1) PAGENO="0006" 2 options address the future approach to accommodating electrical energy supply and demand in the Tennessee Valley area. PROJECT1ON OF FUTURE POWER NEEDS OVERESTIMATED The most important conclusions of this report indicate that future electricity demands in the Tennessee Valley could be lower than the TVA has predicted. The report states, and I quote, "Our projections indicate that there could be excess capacity ranging from 6,700 to 24,800 MW in the year 2000". The General Accounting Office examines TVA's load forecast and makes projections of future demand for the Tennessee Valley Authority power service area. GAO's high forecast is 17 percent lower than TVA's own forecast, and GAO's low projec- tion of peak demand is 40 percent lower than~ TVA's own projection. So, this raises some basic issues which must be addressed. The General Accounting Office has questioned TVA's projection of the future power needs of the Tennessee Valley area, and the General Accounting Office says that demand for electricity in the valley could be 17 to 40 percent lower than TVA is projecting for the year 2000. The General Accounting Office goes on to say that if their load de- mand projections are correct, TVA would, "need no new expansion be- yond its seven nuclear powerplants through the end of the 20th century". REEVALUATION OF TVA~S EXPANSION PLANS So, I repeat, the General Accounting Office's projections have raised serious questions which must be answered and which must be ad- dressed. If the GAO projections are correct, then TVA needs to re- evaluate its position in this matter before making plans to expand its capacity beyond that which has already been planned. Now, recently the Carter administration announced plans to sub- mit legislation to the Congress, which would increase TVA's bor- rowing authority by $15 billion-increase it from $15 billion to $30 billion. The Carter administration has been persuaded that the TVA will need this additional borrowing authority in order to expand its power generating capacity to meet future demands beyond the year 2000. IS INOREASED BORROWING AUTHORITY NECESSARY? Now, let me say, and `make it clear at the outset of these hearings, it's my belief and firmly held conviction that the Tennessee Valley Au- thority needs flexibility to grow and to meet future power needs. how- ever, I've been concerned by GAO's report, and by the General Ac- counting Office's demand forecast. If the GAO's forecast is correct, this raises serious questions about the need to expand TVA's borrow- ing authority by 100 percent. So, the purpose of this hearing is to examine the GAO report. I in- tend to be objective. This is a factfinding hearing. I want to question the representatives of the General Accounting Office very carefully about GAO's projections. I also want to question the TVA concerning its own projections which indicate that an expansion of generating capacity may be necessary. I also want to question a panel of experts from the Oak Ridge National Laboratory and the University of Ten~ PAGENO="0007" 3 nessee concerning their independent views of future electricity needs in the Tennessee Valley area. FIRM FINANCIAL BASE NEEDED FOR FUTURE EXPANSION So, let there be no question about it now, we must provide a firm financial base for TVA. We must assure that the TVA has the ability to grow and to meet the power demands of this area. We must assure that we never have an energy shortage in Tennessee, and we must as- sure that we have the energy to expand our economy and provide new job opportunities for all of our people. So, the purpose of this hearing is to clear the air and to get the facts; and in order to support an expansion of TVA's bonding au- thority, I want to have all the facts when I appear before the Senate Budget Committee. We have two very responsible and very respected agencies of the Federal Government at loggerheads here, and we need to try to resolve this impasse. FUTURE ELECTRICITY DEMANDS IN TVA AREA Now, I think it's necessary to make one additional statement. The purpose of this hearing deals solely with the demand projections for the Tennessee Valley area. The question before this hearing is: "Can TVA meet its future electricity demands without increasing its gen- erating capacity?" This hearing is not to discuss the kind of new gen- erating capacity that may be needed. This hearing is not to determine whether TVA needs to build a new nuclear powerplant or some other kind of power-generating facility. That is simply not the issue. This hearing is simply to determine if a need for capacity expansion actually exists. If there is need for additional capacity, then we must deal at a later time with the question of the type of energy production that might be needed. TvA IMPACT ON ECONOMY OF AREA So, I open these hearings today under these guidelines. We're not here to discuss rates, and we're not here to discuss nuclear powerplants. We are here to discuss a more basic question, the future electricity demand in the Tennessee Valley area; and we're here to assemble addi.. tional facts regarding what the future holds for the TVA and what the future ho1ds for the people of the Tennessee Valley area, and I have a responsibility as a Member of the U.S. Senate from Tennessee, and as a member of the Senate Budget and Appropriations Committees, to thoroughly understand the needs of the Tennessee Valley Authority. This agency affects the lives and the pocketbooks of every man, woman, and child in the Tennessee Valley area. It's important to all of us, and we must assure a bright future for TVA if we're to assure a bright fu- ture for our neople. I want to make it clear that we can never short- change ourselves on energy, or I think we will surely shortchange the future of the valley. 1-Taving said that, we'll ~et into calling our witnesses. We'll call first the representatives of the General Accounting Office, led by Mr. J. Dex- ter Peach, who's the Director of Energy and Minerals Division, and his staff. PAGENO="0008" 4 Mr. Peach, if you would be good enough for the purpose of the record to introduce your colleagues, we would appreciate it. STATEMENT OP J. DEXTER PEACH, DIRECTOR, ENERGY AND MIN- ERALS DIVISION, GENERAL ACCOuNTING OFFICE, ACCOMPANIED BY JOHN CLARK, ATLANTA REGIONAL O:FPICE; MITCH WIL- LIAMSON AND JOHN BROWN, WASHINGTON OFFICE; AND COY BALEW, ATLANTA REGIONAL OFFICE Mr. PEACH. Thank you, Senator. I have with me today, starting at my left, Mr. John Clark of our Atlanta regional office, Mr. Mitch Williamson of our Washington office, Mr. John Brown of our Wash- ington office, and Mr. Coy Balew of our Atlanta regional office. All of these gentlemen were involved in some way in working on the report that we issued on TVA in November. I, myself, am Director of the Energy and Minerals Division of the General Accounting Office. We appreciate your invitation today to discuss our recent report en- titled "Electric Energy Options Hold Great Promise for the Tennes- see Valley Authority." I'll focus my statement today on two areas in which you expressed special interest. The conclusion in our report that TVA could meet power needs through the year 2000 without constructing any more central station powerplants beyond those under construction or licensed, by emphasiz- ing instead energy conservation, improved power management, and the use of renewable resources; and The implication of our report on TVA's request to increase its bor- rowing authority above the existing $15 billion. DIFFERENT PROGRAMS AND PRIORITIES NEEDED TVA has important responsibilities not only as a. supplier of elec- tricity, but also as an energy leader. Our work showed a need for dif- ferent programs and priorities if TVA is to reflect national energy goals and to continue its role, since its creation in 1933, as a national yardstick. When we started our work, TVA's future planning was based on a July 1977 single load forecast which projected an average annual electricity growth rate of 4.5 percent for a 15-year period. We believe the use of a single estimate for electricity growth implies that the amount of growth required is predetermined when, in fact, consider- able influence can be exercised. It is for this reason that we developed two alternative projections designed to evaluate the effects of various conservation and other programs consistent with emerging national energy goals. Our high projection indicated an average annual growth rate to the year 2000 of 4 percent and our low projection an average annual growth rate of 2.7 percent. Of course, we cannot state with certainty that either of our projec- tions will precisely represent the future. I believe they do show, how- ever, that increased emphasis on conservation and demand manage- ment could reduce substantially the electricity which will be required if such measures are not taken. PAGENO="0009" 5 TVA AS A LEADER IN ENERGY CONSERVATION We believe TVA has the opportunity to demonstrate the benefits of pursuing various demand options in residential applications, power management, and solar alternatives. By exercising various options, TVA could: (1) Reduce the growth rate of electricity demand, (2) make the existing power system more efficient, and (3) defer new gen- crating systems. For example, TVA could save electricity and reduce energy-related costs in area households by implementing the three residential programs in the national energy plan. These include ap- pliance efficiency standards, thermal standards for new construction, and several measures to encourage insulating existing residences. PRESENT CONSTRUCTION PROGRAM ADEQUATE FOR NEAR FUTURE Many options also exist for meeting TVA's region power needs other than through traditional focus on large central station nuclear construction. Our analysis showed that completion of plants pres- ently under construction or licensed could, when coupled with a new efficiency in consumption, meet demand through the early 1990's. With expanded conservation, improved power management, and the use of renewable resources, our analysis showed the region could meet its power needs through the year 2000 without thermal plant construction beyond that now in the licensing process. This would allow time for evaluation, development, and testing of alternative options before making additional commitments to large central sta- tion plants. BETTER PLANNING AND FORECASTING SYSTEM NEEDED To take advantage of this opportunity, we recommended that TVA abandon its practice of issuing a single forecast based largely on extrapolation of historic funds. Instead, TVA should develop a long- range comprehensive plan and several demand forecasts which could better reflect changing national goals. Such a plan could assess optional courses of action both from a cost-effectiveness viewpoint and in terms of TVA's yardstick function. TVA and the public could then evaluate the benefits and costs of alternative electricity futures and, as our projections suggest, consider initiatives which could in- fluence future trends in electricity use. While doing our work, we maintained an open dialog with TVA regarding our tentative findings and conclusions including a briefing of the now Chairman of the TVA Board, after his appointment as a Board member was announced. We believe TVA's overall response has been positive, particularly in its efforts to improve its planning and forecasting system. In July 1978, ~f VA developed several fore- casts and extended its forecasts further into the future. In addition, TVA expanded its conservation-related programs. TVA's most recent projections include four forecasts, the lowest of which is close to our high projection. We believe this approach is a step in the right direction and will offer TVA. management som.e new opportunities for considering various options for the future. PAGENO="0010" 6 ENERGY SUPPLY ALTERNATIVES As part of TVA's long-range comprehensive plan, we recommended that it undertake the following demand option: Increase efforts to implement national energy goals; Actively encourage installation of heat pumps in all new construc- tion, in conjunction with the education and certification of heat-pump installation and maintenance; Study and implement seasonal and time of day rates; Expand the use of interruptible contracts, but offer them on a regular interruption basis rather than on am emergency; Initiate a program to switch off hot water heaters and larger air-conditioners during the peak hours; and Evaluate and pursue opportunities for matching variable loads in the region. UTILIZATION OF SOLAR ENERGY To further decrease electricity demand, TVA should: (1) Promote the use of solar passive building design with incentives such as design awards for builders, similar to the heat-pump: and supersaver home programs. (2) Design a strategy similar to the above promotion for solar water heating. In addition, TI/A should provide alternatives for making these systems economically competitive for the consumer (such as reduced rates), since they are less costly to the power system than adding new generation capacity. (3) Participate with the Department of Energy in the research and development of solar space heating and cooling for application in the region. If the above options and other TI/A initiatives do not adequately reduce power demand, TI/A should consider applying a power rate surcharge, or issue bonds to provide money that could be used as an incentive to further conservation and the use of renewable resources. APPLICATION/DEMONSTRATION MODELS Concerning energy supply alternatives, TI/A should undertake an application/demonstration of cogeneration teclmologies, flue gas desulfrization technologies in its coal-fired plants, and construct com- mercial-scale atmospheric fluidized bed combustion. Federal funding should be requested for that portion of those costs that exceed TI/A's incremental cost per kilowatt. This would prevent TI/A's customers from bearing the additional cost of a demonstration that benefits the Nation as a whole. NATIONAL ENERGY PRIORITIES If TVA carries out the recommended programs, it can regain its position as an energy leader and as a model for the utility industry. Not only the Tennessee I/alley, but the entire Nation. stand to benefit. To assure this outcome, we believe the Cowrress should revise TI/A's legislative charter to better reflect current national energy priorities. TI/A should be charged with: PAGENO="0011" 7 Leading in the development of electricity management plans and programs, Encouraging energy conservation and the most efficient production and use of energy, Encouraging the use of renewable resources, and Assuring adequate public involvement in energy planning and policymaking. I might digress just a moment from my prepared statement, Senator, to add some emphasis to say that we do think this is an important recommendation. The role of the Tennessee Valley Authority as a leader in the energy area and as a producer of electric energy has grown tremendously. Its role has evolved from that which was originally set out in the legislation creating TVA. We think with the energy situation today and with this growing role of TVA, it would be a reasonable time to update its charter to assure that it follows courses of action which we currently see it undertaking now. TVA BORROWiNG AUTHORITY In regard to TVA borrowing authority, the Congress authorized TVA to incur a total indebtedness of up to $15 billion to finance its power program. As of September 30, 1978, TVA had $7.2 billion in- debtedness outstanding and projected an outstanding level of $9.1 billion by September 30, 1979. Although our TVA study did not directly address the need for additional borrowing authority at this time, GAO has also conducted a recent review of cost overruns on three TVA nuclear plants under construction. That review indicates that borrowing of $11.8 billion will be needed to finance the construction of those three plants and all other nuclear plants now under construction which are scheduled for completion by 19~86. An internal TVA study, which we did not verify, shows that the $15 billion borrowing authority could be exceeded by 1983 and indebtedness could reach $28 billion by 19t88, In addition, some funding would be required to carry out the type of programs which we recommended in our report. It seems clear that at a minimum TVA will need an increase in its borrowing authority to about $20 billion just to finish the nuclear plants already under construction. Beyond that, the additional amount needed and the time frame for when it will be required could vary significantly. As our alternative projections have indicated, the need for adding additional capacity is based on many assumptions and uncertainties, and there are various options available for (lecleaslng or meeting demand that could have significant impacts on TVA's borrowing needs. CONGRESSIONAL OVERSIGHT OF TVA OPERATIONS This is the key reason we suggested in our report closer congres- sional oversight of TVA operations. We recommended that TVA's plans should be reviewed and commented on by as wide a spectrum of regional citizens and institutions as practicable and by the Depart- ment of Energy, to assure consistency with national priorities. TVA, PAGENO="0012" 8 when its final plan is finished, should submit it to the Congress. The Congress should then evaluate and monitor the implementation of the plans. We, of course, would stand ready to assist Congress in this regard. That concludes my prepared statement, Senator. I and members of my staff will be happy to answer any question you have. IMPOSE SURCHARGE FOR ADDITIONAL CONSERVATION SAVINGS Senator SASSER. Well, thank you, Mr. Peach. I found the GAO report to be very informative, and I think it had some excellent ideas in it. I don't know how many of them were entirely new and unique, but the report was very helpful. There are some questions that do come to mind immediately. The General Accounting Office report has made several recommendations atid listed various options for reducing TVA demand, and the report states, and I quote from it: "If the options do not reduce demand adequately, TVA could effect additional conservation savings by applying a surcharge or issuing bonds that would result in similar effects." Now, could you elaborate on that proposal, Mr. Peach? Mr. PEACH. Yes, Senator, there are a number of conservation pro- grams we've suggested, and other programs TI/A could undertake to reduce demand. The suggestion of a surcharge comes about after you follow these programs, and find at a point in time that they're not as successful as you would like. You could then follow the approach of applying a surcharge or issuing bonds in order to obtain the capital needed to provide incentives to induce additional conservation and undertake conservation~related kinds of programs. Either way, whether you imply implementing a surcharge approach, or whether you issue additional bonds, eventually there are costs involved that get back into your rate system. WOULD SURCHARGE BE COMPATIBLE WITH TVA ACT? Senator SASSER. Well, the matter of a surcharge, I question the advisability of that. First, it appears to me that it would be infla- tionary, and possibly ineffective in reducing demand, and frankly, I'm not sure that the TI/A Act would allow the imposition of a sur- charge. The TI/A Act requires rates to be as low as possible, and directs that the sale of power be made to the, and I quote, "ultimate consumer without discrimination as between consumers of the same class." * Now, did the GAO review the restraints of the TI/A Act before making this particular suggestion with regard to a surcharge, to your knowledge, Mr. Peach? Mr. PEACH. I'll ask Mr. Williamson of my staff to respond. BENEFITS DERIVED FROM SURCHARGE Mr. WILLIAMSON. Yes; we did look into it, and it would depend upon the approach used. We believe an increased price for the elec- tricity would induce conservation and create the capital needed to be PAGENO="0013" 9 used in other conservation programs, and in the long term these conservation efforts could possibly delay or totally postpone any future central construction, so that the cost to the ratepayers of the. valley would be less. Senator SASSER. Then, you think the surcharge would be compatible with the TVA Act, I presume? Mr. P]~&CH. I think it would be. I think the issue you're raising though, Senator, certainly is a legitimate question that would have to be looked at carefully if TVA should choose to follow that. course of action. As you're probably aware, that is one of our recommendations with which TVA has said it is in disagreement and a course of action that it would not choose to follow. Recognizing that the surcharge option would be a controversial alternative is one of the reasons we included in our recommendation the option of using the bonding authority which they do have. DIFFERENCES IN GAO LOAD FORECAST AND TVA RESPONSE Senator SASSER. Agencies which are the subject of General Account- ing Office reports have 60 days to file their further comments with the House Committee on Government Operations and the Senate Com- mittee on Governmental Affairs. Now, the TVA in its response to the Government Operations Committee of the' House said, and I quote: The General Accounting Office load forecast failed to take into account trans~ mission losses, outdoor lighting, and interdivisional electricity sales within TVA. Thus, if these elements had been taken into account, GAO's lowest load forecast would have found that TVA needed 4,000 to 5,000 MW of added generating capacity in this century. Now, that was the response that was flied with the Senate Com- mittee on Governmental Affairs by the TVA to the GAO report. Now, my question is this, is it true that the General Accounting Office failed to include these elements in its forecast, a.nd second, if these elements are included, is T'VA's statement of added generating capacity correct? Mr. PEACH. Let me answer that a couple of ways, Senator. Only late last week did I first see a copy of TVA's letter to the committees of the Senate and the House.1 That was not an issue raised by TVA in their official comments on our report, so just since last week have we been looking into this particular question. My understanding at this time is that the projections we developed are on a comparable basis with the forecast we used for TVA. In other words, the TVA projection of 4.5 percent also does not include those factors, nor does our low projection of 2.7 percent and our high pro- jection of 4 percent. I also believe from our preliminary work that a question exists as to whether including those items would have any significant effect on the pe.ak required, which is what you usually build your generating systems to meet. What I would like to do is to complete our looking into this area and provide something for the record that would attempt to reconcile this issue including the ques- tion of just how it effects peak demand, and the implications of adding those features into both sets of projections and what it would mean. 1 See p. 113. PAGENO="0014" 10 GAO AND TVA PROJECTIONS INCOMPLETE AND INADEQUATE Senator SASSER. If you would do that and provide that for the record, I think it would be very helpful in making the record com- plete on this particular issue, and I think we do need to have that controversy resolved and laid to rest at some pomt if we can do so. [The following was subsequently supplied for the record by GAO:] GAO PROJECTIONS AND PEAK DEMAND FOR TVA SERVICE AREA The GAO projections of peak electrical demand for the TVA service area do not ignore outdoOr . lighting, interdivisional TVA power use, losses, etc., as. .TVA alleges. As. with other figures in the report, the TYA and GAO prOjections are based on different methodologies. Further, because both TVA's and GAO's pro- jections of peak demand are derived from projections of total electrical usage, differences in the assumptions and methodologies used to derive the projections of total electrical energy usage cause differences in the peak demand projections. As mentioned, both TVA and GAO used a methodology which derives system peak demand from the projection of electrical usage. TVA projected electrical usage using the methodologies and assumptions which are described in our report. GAO, using different methologies and different assumptions, derived GAO high and low projections for various years between 1975 and 2000. These projec- tiOns, along with TVA's projections, are shown in Table 11-4, page 11-2, of our report. . The figures in this table, TVA's and GAO's, exclude outdoor lighting, interdivisional TVA power use, losses, etc. Because of this; the figures can be compared. As pointed out on the next page of the report, "In the 1977 TVA Load Fore- cast, peak : demand was projected to grow at about the same rate as total demand." Thus, we projected a peak demand growth which was roughly the same as thO growth of total electrical usage in our high and low projections. The results of thls methodology are shown in Table 11-6, page 11-14 of our report. Again, ~VA's projections are included for comparison. The 1975 base figure of 18,600 megawatts used in this table is a total TVA system figure, and thus includes outdoor lighting interdivisional TVA power use, losses, etc. Because our 1975 base figure from which we projected peak demand is for the entire TVA system, the projections shown in this table are for the entire TVA system, using the methodology described above. ~VA uses a different methodology which takes into account the various his- torical load factors (relationship of average demand to peak demand) of different classes of customers. These load factors are then applied to TVA's predictions of electrical usage and a peak demand for each class of customer is derived. The sum of the individual customer peaks is the system peak. Senator SASSER. Now, the General Accounting Office report reads, and I quote, reading from the report now, "the data on which the TVA and General Accounting Office projections are based are incom- plete and inadequate." Now, that seems to indicate that there is a con- siderable margin of error in not only your projections, but perhaps in TVA's projections. Now, what effect does this lack of data have on the projections, and what can be done to improve the data? Does GAO have any recommendations on that? Mr. PEACH. In a moment I'll ask a member of my staff to respond in a little bit more detail to that question, Senator, but it might be a gcnd time to say that obviously when you're dealing in this busiuess of projections, and looking into the future, it's pretty hard to say with any certainty whether one set of projections is exactly right or wrong. My original Suggestion and the one we emphasized most strongly to PVA is that you should have a variety of projections which are based on alternative assumptions, you need to maintain your development of information throughout the period of time, and try to measure what's PAGENO="0015" 11 happening against your projections and adjust theni accordingly as you get a better feel for reality. This is a course of action which we now see TVA following in terms of moving to four forecasts, and we understand that they may be mov- ing to, perhaps, an even greater number of alternative forecasts. But in terms of specific inadequacy of the data, I'll ask Mr. Clark if he'll comment. UTILITIES SUFFER FROM INCOMPLETE DATA BASE Mr. CLARK. Senator, there is a general lack of end-use consumption data throughout the utility industry such as appliance saturation, the average annual usages of appliances, and the makeup of the industries and commercial businesses. There's an incomplete data base and TVA is not the only utility suffering from that. It's national, but it is a problem. We recognized this with their projections, and ours reflects the same problems. Senator SASSER. IFlave we got any recommendations of how we can improve this data base? Mr. CLARK. Yes, sir, we have recommended and TVA is doing work in the area of surveying for appliance usage and they're metering ap- pliances. They're surveying for ownership of types of appliances, and we feel like a lot more can be done in this area. FEDERAL FUNDING FOR TVA EXPERIMENTATION Senator SASSER. Well, certainly I think more needs to be done so that we can have the clearest and most accurate data possible to make future projections. I think it's crucial that accurate projections can be made of energy demands for the future. Now, the General Accounting Office has made several recommenda- ations that TVA take the lead in demonstrating various supply alter- natives, such as fluidized bed gas systems. Now, I commend the General Accounting Office for this recommendation. Now, the President has made it clear that he wishes the Tennessee Valley Authority to be an energy leader, and I applaud that policy. The GAO recommended that in these instances where the Tennessee Valley Authority demonstrates or takes the lead in energy alternatives, experimental energy alterna- tives, that any added cost over and above the traditional power costs should be federally funded. Now, let me say at the outset that I agree with this statement. When TVA ventures into speculative areas, and the Nation as a whole stands to benefit, and derive benefits from their experimentation then I don't believe that the ratepayers of TVA should pick up the tab solely for developing alternative energy sources, or for this experimentation. Would the GAO care to comment on this beyond what you have in your report? Mr. PEACH. Not other than to say, Senator, that I agree with you. What we tried to do in this particular case was look at two things: (1) TVA has this yardstick function that was originally set out for them, and (2) they also are the biggest utility, so what better opportunity to demonstrate some of these new technologies in terms of an actual demonstration showing how they can work. They also have a very capable staff and capable people. PAGENO="0016" 12 Certainly when you're talking about demonstrating these kinds of technologies which could serve a national purpose, are somewhat speculative as to how successful they are going to `be, and how they would fit into the overall system, then it should not be the ratepayers of TVA who bear all the risks and cost. But, it should be paid from regular appropriated funds from the Federal Government. IS SOLAR ENERGY AN EFFECTIVE ALTERNATIVE? Senator SASSER. Well, I agree with the General Accounting Office recommendation a hundred percent on that, and I suspect' the rate- payers in the Tennessee Valley area will also agree a hundred percent. One of GAO's energy demand alternatives is the use of solar energy through such applications as solar passive building design, solar water heating, and solar space heating. Now, the report states that solar could further reduce the demand for power `by more than one- half billion killowatts annually by the year 2000. Now, I'm advised that the Tennessee Valley area cannot economically utilize solar at this time. Your report goes on to say though, and I quote, "in the TVA region solar space heating and cooling is not currently cost effective in any situation." Now, since solar cannot economically be utilized, why does the General Accounting Office list it as an effective alterna- tive here in the Tennessee Valley area for reducing area demand for electricity, if we can't effectively use solar here? Tell us why you don't think we can effectively use solar here, if that's the case, Mr. Peach. Mr. Pi~&cu. I'll ask Mr. Williamson to answer that question. COST EFFECTIVE SOLAR OPTIONS Mr. WILLIAMSON. What we have analyzed in this particular situa- tion was several solar options. The first which you mentioned was solar passive building design. That's such things as the kind of ma- terials and colors you use and the location of shade trees, things of that nature that will happen once the `building is built, and continue to happen which save energy. That option is definitely cost effective. The second option we reviewed was solar hot water heat&ing. In our particular analysis soTar hot water heating is also cost effective in the Tennessee region. The only option which we reviewed that was not cost effective at this point in time is the solar space heating and cooling, which I don't believe is cost effective any place in the United States at this time. But the two option~ that are cost effective were considered in our analysis and savings were projected in terms of both energy and dollars if these option's were applied in the region. Senator SASSER. I see. You say that the solar space heating or cooling is not cost effective, you don't `think, anywhere in the United States, not just the Tennessee Valley area? INITIAL CAPITAL OUTLAY DETERRENT TO SOLAR HEATING AND COOLING Mr. PEACH. I'm not sure that that's the way I want to come out on it as to whether it's not cost effective anywhere in the United States. There are a number of issues concerning this area and we have other work ongoing in the General Accounting Office looking at solar heating PAGENO="0017" 13 and cooling demonstration programs which the Federal Government is pushing and other things that are happening in the solar area. Ob- viously the big thing you have to get over, particularly in the solar heating area, and there are many more problems when you go to cooling as opposed to just solar heating, is the initial cost of the equipment, and the willingness of people to make that initial capital outlay for something that maybe will pay back over a long period of time. I think that's still one of the basic hangups or problems even in the Southwestern areas and Florida where they have much more sun and where you can anticipate that it's more likely to be cost effective now. INCREASED USE OF ELECTRICITY IN TENNESSEE VALLEY AREA Senator SASSER. The General Accounting Office report states, and quoting from the report, this is a quote, "per household electricity use grows from about 16,000 kilowatts in 1976, to almost 20,000 kilowatts per year in 2000." Now, because of so many all-electric homes in the Tennessee Valley area, the average TVA residential customer uses roughly twice as much electricity as does the average American home. Now that the residents of the valley are beginning to practice better conservation, I would expect to find the average amount of electricity consumed to be reduced or at least not increase appreciably; yet you've indicated an average increase in consumption of 6,000 kilowatts between now and the year 2000 here in the Tennessee Valley area. What's the reason for that? What's your rationale? Mr. PEACH. Mr. Clark. MORE EFFICIENT APPLIANCES COSTLIER TO OPERATE Mr. CLARK. Senator, there's several reasons that the average usage would increase. For instance, the freezers and refrigerators that are frost-free, which are coming on the market now and replacing the older models, use roughly 50 percent more energy than the older models. There are projections for increased use of electrical vehicles, far beyond what we presently have. These sort of things could cause usage to go up even though the efficiency might be much greater than at present. COST OVERRUNS IN TVA CONSTRUCTJON Senator SASSER. At the begining of the hearings, I stated that these hearings were not desiged to discuss the pros and cons of nuclear power plant construction in the TVA area. In the past at hearings of the Public Works Appropriations Subcommittee in the Senate, of which I'm a member, I've expressed my concern about the massive cost over- runs in TVA in the construction of TVA's nuclear reactors. In your testimony you stated that the General Accounting Office has been studying the TVA construction program. N~w, when do you anticipate that report to be completed and be re~ eased to the Congress and to the public? Mr. PEACH. I anticipate it will be released within the next month, Senator. It's in the final stages of processing within our Office. We have already received TVA's comments on the draft of the report, and 45 ~72O-79----2 PAGENO="0018" 14 are in the process of incorporating those and getting it ready for signature. ADDITIONAL BORROWING TO COMPLETE PROJECTS Senator SASSER. Well, you've testified that your review indicates that additional borrowing of $11.8 billion will be needed. just to com- plete those seven nuclear plants that are already under construc- tion, well, I think six that are under construction now, or have been ordered by the TVA. Now, tell us why you project such continued cost escalations? I noticed in the morning newspaper that TVA is indicating they can be completed, I think, for $2 billion. Mr. PEACH. Well, I think the question is where your starting point is from, Senator. We use as our starting point, when we talk of a cost escalation, the initial estimate that was made at the time . the authorization was put forth for the plan originally. I haven't looked at what's been spent so far and how much more they think it will take to complete construction, but when we talk in terms of that amount of cost escalation we're talking in terms of the original esti- mate that was made to where it stands right now in terms of what it would take to complete it. CONTROL COST ESCALATIONS IN NUCLEAR PLANT CONSTRUCTION Senator SASSER. I see. Well, what do you think can be done by the Tennessee Valley Authority to get these cost escalations in the con- struction of nuclear plants under control? Mr. PEACH. Well, I guess the first statement I would make is that the Tennessee Valley Authority doesn't necessarily find itself in a unique position in experiencing significant cost overruns on nuclear power- plants. A situation that we are aware of, for example, in the Pacific Northwest indicates that five plants originally expected to .J~ con- structed for about $4 billion are now going to cost them over $10 billion. It seems to be a continuing problem as we learn more about what is going to be required to license and construct a plant, of stretching out the amount of time that is required for the construction, of im- posing new and additional regulatory requirements as we learn more about problems that we see in the nuclear energy area, and all of these things seem to have that one common feature of adding to the cost ultimately that is required for the plant. Senator SASSER. Well, Mr. Peach, I want to express my appreciation to you and your colleagues from the General Accounting Office for appearing here today and giving us your views on the TVA and its future vis-a-vis the Tennessee Valley area. I have a number of additional questions which we'll submit for the record and would ask you and your col1eagu~s to respond to these questions as rapidly as you could after you get them.1 Mr. PEACH. We'd certainly be pleased to, Senator. We'd be happy to hear any question you may have. Senator SASSER. Thank you. Our next witnesses will be a panel headed by Mr. John Moore, who will moderate the panel discussion. Mr. Moore is a professor of eco- 1Seep. 103. PAGENO="0019" 15 nornics at the University of Tennessee. Mr. Moore, if you would just ask your panel members to come forward as you're doing there and then introduce them for the record after they're seated. PANEL OF WITNESSES ON REGIONAL ECONOMIC GROWTH AND ELECTRICITY DEMAND' STATEMENT OF JOHN MOORE, PROFESSOR OF ECONOMICS, UNIVERSITY OF TENNESSEE Mr. Moonr. Thank you, Senator Sasser. I will introduce the panel members. On my far left is William Chandler from the university. We seem to have chosen up sides here a bit, but moving from left to right we have Bill Goolsby from the university, Robert Bohm from the university, Roger Carismitli from Oak Ridge National Labo- ratory, Eric Hurst from Oak Ridge National Laboratory, and Jack Gibbons from the University of rilennessee. On behalf of the entire panel, I would like to express our thanks to you for giving us the opportunity to share with you our views on the important question of regiotial growth and electricity demand. I think we all agree that this is a crucial issue both from the standpoint of the region and the Nation. What I suggest that we do is to proceed with formal statements from four of our panelists, all of whom have agreed to limit their comments to not more than 10 minutes, and then have questions and discussion at that point. Our first panelist is 1)r. Eric Hirst who is on leave from Oak Ridge National Laboratory at the present time with the Minnesota Energy Authority. Senator SASSER. Dr. Ilirst. STATEMENT OF ERIC HIRST, ENERGY DIVISION, OAK RIDGE NATIONAL LABORATORY, OAK RIDGE, TENN. RESIDENTIAL ENERGY AND ELECTRICITY PROJECTION IN THE TVA REGION Dr. IIIRST. I participated with the GAO in the preparation of their report during the summer of 1977. The work that I did with GAO dealt with residential energy and electricity projection in the TVA region. Part of our work involved looking at what TVA did in terms of their projections and the projection methodologies, and then develop- ing sonic alternative projections using models that we had developed at Oak Ridge. TVA FORECASTS NOT STATE OF TIlE ART As of the summer of 1977, the projections methodologies that were being used by TVA to produce these forecasts were definitely not state of the art. It was my judgment at the time that the approaches 1 See biographical sketches of panel members, p. 119. PAGENO="0020" 16 that TVA was using then could have been significantly improved, and I think a major conclusion that I drew was that as the Nation's largest electricity-generating organization, and as a major Federal energy agency, TVA really ought to be in the forefront with respect to methodologies for projecting future electricity demand and also energy demand, since the two are closely coupled. DATA BASE SUPPORTING METHODOLOGIES INADEQUATE A second conclusion that I drew from our examination of TVA's activities was made earlier by GAO, and has to do with data. In the residential sectors, the data base supporting the methodologies that TVA used, and therefore the methodologies we used, were completely inadequate. A collection of detailed data is required. It's expensive, but I think it's very important to do. The kind of issues that need to be addressed in this data collection activity include estimates of equip- ment ownership per household by type of fuel and by housing types. How many single-family homes use electricity for heating? Do they use heat pumps or resistance heating? How many have gas water heaters as opposed to electric water heaters? How does that differ by type of housing units, single family versus multifamily, and versus mobile homes? How do these equipment ownership patterns affect patterns of fuel use; electricity, gas, oil, and alternative fuel? How much energy is consumed for particular kinds of appliances, and how does this vary over a time ? Do new refrigerators consume more electricity than refrigerators that were installed 5 years ago? What's the thermal performance of the housing stock, both new housing units and existing housing units? All of this information is important for developing good projec- tions, and it's also important for operating good conservation pro- grams. You need this kind of information to determine where your potentials are, where you can develop programs for cost-effective conservation. WIDER RANGE OF FORECASTS NEEDED TO DEVELOP PROJECTIONS In the July 1977 load forecast report that TVA issued, they pre- pared only a single forecast-one curve that showed their best esti- mate of electricity consumption into the future. This lent an air of certainty to the forecast that is unjustified for any complicated forecasting exercise. As others have said before me, and I'm sure will say after, developing energy-use models and making projections with them is a very inexact process. There are lots of uncertainties in the in- puts to such models, and also in the models themselves. One way to deal with this uncertainty is to develop a range of forecasts so that people in authority who have to make decisions about conservation programs and new generating facilities, can weigh the likelihood of the different outcomes and look at the different forecasts. RESIDENTIAL ELECTRICITY CONSUMPTION FORECASTS The forecast that TVA produced in July 1977 for residential elec~ tricity consumption in 1990 was 64 billion kilowatt-hours. The fore- PAGENO="0021" 17 casts that we produced with our model at the Oak Ridge National Laboratory were considerably lower. They raiiged from 52 to 56 bil- lion kilowatt-hours, 12 to 19 percent lower than TVA's estiiiiates. Now, so far I've been kind of critical of TVA and as I said earlier, this is based on my perceptions of what they were doing as of the summer of 1977. As 1 look at what they've done since then, the picture is entirely different. EXPANDEI) TVA ENERGY CONSERVATION PROGRAM For example, the July 1978 load forecast prepared by TVA remedy many of the problems that I saw a year earlier. The 1978 report from TVA includes four sets of projections instead of just one. I think this is a significant and important step forward in that it allows the TVA Board and the public in general to see what the range of alternatives are for the TVA area. I was also pleased to note that the range of fore- casts that TVA produced for residential electricity demand in 1990 was almost exactly the same as the range of forecasts that we had pro- duced at Oak Ridge the year before. That's not to say that their fore- casts and ours are right; but it's sort of comforting that we covered pretty much the same kind of range. A comparison of the approaches that TVA used in 1977 and 1978 is very encouraging. Many of the suggestions that are made in the November 1978 GAO report had already been adopted by TVA by the time the report came out. I guess my final comment would be that TVA should be strongly encouraged to continue these activities. They have in the last 2 or 3 years greatly expanded the scope and vigor of their energy conserva- tion program, and this activity certainly ought to continue. I think they also should be encouraged to continue their development of better models of electricity demand and energy demand. They're doing this; they just need to be encouraged to continue this activity. FEDERAL FUNDING FOR DETAILED I)ATA ON ENERGY USE I think the TVA Board also ought to appropriate money sO that TVA can collect detailed data on energy use in the valley, for all sectors, not just the residential sector, but also the commercial and industrial sectors. Although the cost of collecting data is hi~h. it's insignificant compared to the cost of new powernlants, and so I think it is a very cost cost-effective investment, both for developing better conservation programs, and aTso for building better forecasts. Thank you. PREPARED STATEMENT OF ERIC HIRST, ENERGY DIVISION, OAK RIDGE NATIONAL LABORATORY, OAK RIDGE, TENN. PRoJEcTIoNs OF FIXTURE DEMAND FOR ELECTRICITY IN THE TVA REGION: THE RESIDENTIAL SECTOR1 The material presented here is based on work done at ORNL for the U.S. General Accounting Office during the summer of 1977. Results of this work appear 1 Thia is a summary of oral testimony presented before Senator Jim Sasse" at hearinrs on future power projections In the Tennessee Valley, held on Feb. 1~, 1979, in Knoxville, Tenn. Research sponsored by the U.S. Department of Energy under Contract W-7405-- eng-26 with the Union Carbide Corp. PAGENO="0022" 18 in chapter 5 and appendix II of the GAO report, "Electric Energy Options Hold Great Promise For The Tennessee Valley Authority," published in November 1978. Because the work on which this statement is based was done in mid-1977, my suggestions may be seriously dated. My conclusions concerning TVA's projections of future residential electricity demand are: ENERGY AND ELECTRICITY PROJECTION MODELS 1. The projection methodologies being used by TVA's Analysis Branch in 1977 were definitely not state-of-the-art. TVA used three different methods of pre- paring projections; results of these three were compared with each other and a final single projection was prepared, based on the judgments of the analysts. Unfortunately, none of the TVA methods was explicitly sensitive to both the engineering and the economic determinants of residential electricity and energy use. The method that TVA relied on most heavily is an econometric model that relates residential electricity demand only to economic determinants, such as fuel prices and incomes. Thus, the effects of government conservation programs (developed by TVA, state energy offices, and the U.S. Department of Energy) and new~ residential energy technologies (e.g., solar water heaters, im- proved electric heat pumps) could not be explicitly included in the TVA model. Therefore the effects of such conservation programs and improved technologies were either analyzed in an offline ad hoc fashion or ignored. As the Nation's largest electric utility and a major Federal energy agency, the TVA should be active in the development and application of improved energy aiid electricity projection models. DATA BASE OF ELECTRICITY MODELS INADEQUATE 2. The data base supporting the 1977 residential electricity models was incom- plete and inadequate. Although collection of detailed data on residential energy use patterns (e.g., equipment ownership by fuel type and by housing type, resi- déntial uses of different fuels, energy requirements for different types of equip- ment, thermal performance of existing and new homes) is quite expensive, the cost of these activities is insignificant compared with the costs of new electricity generating facilities. The value of improved forecasting models constructed with a more detailed, accurate, richer data base is likely to be immense in that it will allow TVA to better anticipate the need for and timing of new powerplants. TVA'S ACTIVITIES PLAY ACTIVE ROLE IN SHAPING FUTURE DEMAND 3. In their July 1977 load forecast, TVA prepared only a single forecast for the TVA Board. This lent an air of certainty to the forecast that is unjustified for any such complicated forecasting exercise. It also obscured the fact that TVA has various tools tb~t can be used to influence growth of electricity demand in the TVA region. TVA's activities are not limited to only meeting projected demand; they can (and are) playing an active role in shaping future demand. RESIDENTIAL ELECTRICITY CONSUMPTION PROJECTIONS 4. The forecast that TVA produced in the J~uly 1977 forecost showed residential electricity consumption at 64 billion kilowatt hours in 1990. Projections developed with the ORNL residential energy use model (calibrating the ORNL model to accurately predict residential electricity use in the TVA region from 1970 through 1976) showed a range in 1990 residential electricity use of 52-56 billion kilowatthours (12-19 percent lower than TVA's estimate). Our high estimate assumed that no government conservation programs were adopted. Our low estimate assumed vigorous and effective implementation of TVA's $uper $aver Home program, attic insulation program, and heat pump certification program; plus adoption of the residential conservation programs proposed by President Carter in the April 1977 National Energy Plan. LOAD FORECASTS 5. The July 1978 Load Forecasts prepared by TVA remedy many of the prob- lems seen in 1977. The 1978 report includes four ~sets of projections rather than only one: (1) Medium economic growth, expanded conservation. (2) Medium economic growth, new end-use technologIes. (3) High economic growth, ex- panded conservation, and (4) High economic growth, new end-use technologies. PAGENO="0023" 19 These forecasts show a range in future electricity use that should help the TVA Board make decisions about TVA programs to encourage energy conservation and/or to construct new power plants. The range in estimates of 1990 residential electricity demand was 51 to 58 billion kilowatthours, almost identical with the range of results from the ORNL projections. IMPROVED FORECASTING METHODOLOGIES 6. A comparison of the approaches used and results presented in the 1977 and 1978 load forecasts produced by TVA are very encouraging. TVA appears to have adopted many of the suggestions made in the GAO report (before the GAO report was even published). The TVA should be encouraged to continue their progress in developing improved forecasting methodologies, collecting better and more detailed data to support these improved models, publishing a range of forecasts, and-most important-developing and implementing a set of vigorous conservation programs that will encourage TVA residents to adopt cost-effective energy conservation measures. Senator SASSER. Well, thank you, Dr. Hirst, and I understand that you flew in from Minnesota today to give US the benefit of your thoughts, and I appreciate that very much. Dr. HIRST. Well, it's about 400 warmer here. BETTER DATA BASE OF ENERGY USE ESSENTIAL Senator SASSER. Well, that's a good reason to come down here. Dr. ilirst, a couple of times in your statement you touched on the fact that the data base, and the data figures were inadequate, and I think stated something that's very obvious, that having accurate data, even though it's expensive to collect compared to the construction of a powerplant, is ve.ry cost efficient. What can we do about getting better data? I asked the General Accounting Office witness that and felt that we need to sort of amplify, perhaps, on his views. RANDOM SAMPLING OF HOUSEHOLDS Dr. JIIRST. Well, I would recommend a number of approaches. One would be to survey households, have people go to a random sample of households in the TVA area and interview people. Ask them ques- tions about the appliances and equipment that they own, the type of fuels they use, and so on. This is something that TVA could do in a less expensive manner than one would think, because the Energy Information Administration in DOE is now conducting a very de- tailed, comprehensive survey on residential energy consumption throughout the Nation, and it's likely that TVA could use the exact same interview form, arid basically pi.ggyback on what DOE is doing. MONITOR ELECTRICITY AND NATURAL GAS CONSUMPTION I think, in addition, TVA should monitor electricity and also natural gas consumption in a sample of the valley's homes; not just total consumption, but submetering, where you determine the electricity used for particular appliances. I think the important ones there are space heating equipment, water heating, and refrigerators. These are the largest energy uses in the residential sector, and I think TVA should make the effort to collect actual data on what consumption is for these different pieces of equipment. PAGENO="0024" 20 Senator SASSER. Now, you made the remark earlier that you found TVA's-initially, you found TVA's demand forecasts techniques to be inadequate or lacking, and now that you find their demand fore- cast techniques to be improved, at least in your view, Dr. Hurst. Could you elaborate on how they are improving their demand forecast techniques? METHODOLOGIES USED IN TVA EXPANDED co~ SERVATION PROGRAM Dr HIRST Only partly I'm not really familiar with the details of TVA's methodologies today My impression is that the original fore casting methodology that they used in 1977 was a purely econometric approach, in which they estimated future electricity consumption as a function only of economic variables; fuel prices and income. This kind of approach does not allow you to consider changes in technology, solar water heating,wood burning, and improved heat pumps. Things like th'it cannot be explicitedly incorporated into the models Also, the kind of conservation programs that TVA now has under way-the super saver home program, the heat pump program-these kinds of programs cannot be entered into the model So, use the model to build a projection of consumption based only on prices and income, and then after you develop this projection, make some judg- ments about how these different programs and new technologies affect demand. What I think TVA is doing now is trying to develop models that are more disaggregate so that they deal not just with overall residential electricity use, but with the specific end-uses. They're also trying to incorporate some of the engineering factors, the technological factors, that influence electricity demand Senator SASSER Thank you very much, Dr Hirst Mr Moore who is your next witness here ~ Mr MOORE Dr Robert Bohm of the department of finance at the university. Senator ,SASSER. Dr. Bohm. STATEMENT OP DR. ROBERT A. BOHM, DEPARTMENT OP FINANCE, AND ASSOCIATE DIRECTOR, ENVIRONMENT CENTER, UNIVER- SITY OP TENNESSEE Dr BOHM Thank you, Senator I have prepared a written state ment for the record from which I will now read very selectively During 1977-78, along with several of my colleagues at the Urn versity of Tennessee, I worked on the General Accounting Office's evaluation of the Tennessee Valley Authority power programs. In my remarks today, I would like to address several issues raised by the GAO study. First, I will review several alternative projections of energy demand now available for the TVA region. Second, I will comment briefly on the relationship of these demand projections to the possible necessity of raising TVA's borrowing authority from $15 to $30 billion. Finally, I will comment on my understanding of the rationale behind the GAO study of TVA po~ er programs and the current relevance of the findings of th'rt study IA t rue emphasize at PAGENO="0025" 21 the start that the statements I will be making are my own opinions and do not represent the position of GAO or the TJniversity of Tennessee. PROJECTIONS OF ENERGY DEMAND AND SUPPLY First, let's address the alternative projections of energy demand and supply. Two of the principal objectives of the GAO study as we've already been told today were (1) to evaluate the feasibility of TVA undertaking several national demonstrations of emerging energy tech- nologies and conservation options, and (2) to establish grounds for financing these demonstrations out of power revenues or alternatively by means of appropriated funds. Until the summer of 1978, TVA provided only a single load forecast. The GAO demand projections were prepared to provide a context within which to consider alter- native supply strategies and demonstration proposals. Three projections of demand through the year 2000 were presented in the GAO report. The existing TVA forecast was taken as a repre- sentative high projection. Two lower GAO projections were prepared. The GAO "high" projection was based on relatively rapid economic growth, no increase in the real price of electricity, and ineffective conservation programs. The GAO "low" projection assumed lower economic growth, an increasing real price of electricity, and increased efficiency in the use of power. Table 1 in my written statement contains data on the growth rates of electric energy demand in the TVA region presented in the GAO study, and compares these with the new 1979 TVA load forecast. These data illustrate two important points. First, all the projections, from both GAO and TVA, show a slowing down of demand growth over time, especially in the decade 1990 to 2000. The second point has to do with the vast array of alternative load forecasts now produced by TVA. A careful reading of the table will reveal that several of the 1979 TVA forecasts are, in fact, lower than the GAO low projection. SUPPLYING PROJECTED ENERGY DEMANDS AT MINIMUM COSTS Turning to the supply side, we adopted a baseline objective of meet- ing projected demands at minimum costs. It was from our supply side analysts that the conclusion was reached that if the GAO low demand projection proved correct, then TVA might not need additional gener- ating capacity before the year 2000 beyond those plants under construc- tion or planned. That essentially means, beyond the Yellow Creek plant. This conclusion must be kept in its proper perspective as an "if then" statement. What it really implies is that there is danger inherit in incorrectly forecasting demand either too high, which would result in waste, or too low, which would result in shortages. With demand projections and minimum cost supply scenarios in hand, it was then possible to evaluate proposed energy demonstration programs and consider alternative methods of financing them. 1-low- ever, in the interest of time, I will skip over the methodology used, which has already been discussed at some length by Mr. Peach. Senator SASSER. Let me say, Dr. Bohm, that I intend to read your report in toto, in detail; please continue. Dr. B0IIM, OK. PAGENO="0026" 22 Senator SASSER. I'm not trying to rush you ; I just want to assure you that we are very intei ested in what you'ie s'tymg I in going to read every woid of it RTLATIONSHII or ~1TTURE POWLR DLMAND AI'~ D TV ~t BORROW ING A~THORTTY Dr BOHM Turning to the relationship of future power demand and TVA borrowing authority, let me say this. Without careful analysis of the TVA's financial projections, it is impossible to state exactly how much borrowing authority is really needed. However, several im- portant issues can be addressed which are raised by TVA's wish to increase its authority to $30 billion. First, I think it's useful to dispense with the notion th'tt unused borrowing authority will somehow "burn a hole" in TVA's corpor ite pocket and lead to construction of unneeded pov~eiplants TVA boi iows money to finance capit'id outlays on ne~ c'Lpaclty iequired to meet projected demand This chain of causation c'tnnot be reversed The TVA's actual need to issue debt must be tied to* projections of future demand of electricity ai d expected future cost of capital equipment. Under conditions of low deln'Lnd growth, TVA has two options (1) Complete already planned f'icilities on schedule and undertake little or no new construction in the 1990's, or (2) extend the construction schedu1e of already planned facilities into the 1990 s Since TVA is required to have bonding authority to cover its financial obligations the second option could lead to higher debt requirements as obhgat~ons from earlier years are extended and layered on top of those commenc- ing in later years Tlndei eithei option, howe~ er, the key factor that might lead to a request for a higher borrowing authority is inflation The TVA must make its financial plans in terms of nominal dollars rather than real or deflated dollars. As a result, some assumption as to the future rate of inflation must be made. The higher the rate of infla- tion assumed by TVA, the moi e likely is a reque'4 for additional boi - i owing `tuthority at an early date ~AOTOPS AFFECTING TVA'S BORROWING ATJTIJORITY Now, what about the case where demand is above the low levels indicated by the GAO low projection? Then TVA must plan for additional new online capacity for the~ early 1990's, and financial obligations would begin in the 1980's. It should also be mentioned that the various national demonstration programs TVA is proposing to undertake, to the extent that they are funded out of power revenues, will draw heavily on TVA's borrowing authority As far as borrowing `tuthority is concerned, therefore, we can conclude that if TVA is now at or near its current debt ceiling of $15 billion, there is good ieason to believe that additional borrowing authority will be needed in the early 1980's Two factors that could lower this pressure on TVA's debt ceiling are lower power demands and a low rate of in- flation. A third possibility might be built around heavier reliance on supply systems that have a relatively short construction period such as industrial cogeneration. With conventional coal or nuclear power- plants, a decision to build must be made 10 to 12 years before any power will actually come online As a hedge against the risk of having too little productive or financial capacity, planners are likely PAGENO="0027" 23 to overstate the energy demand growth rate and the assumed in- flation rate. If the construction lag could be cut to 5 years, projections would have a somewhat higher degree of certainty about them, and upward biases resulting from a long planning horizon might be reduced thereby cutting the need for borrowing authority. LELEVANCE OF GAO STUDY Let us turn briefly now to the overall relevance of the GAO study. It has always been my opinion that the rationale behind the GAO study was presenting a case to establish TVA as a principal national demonstration agency in the energy field. The current validity of the findings and conclusions of that report must be viewed within the time frame in which the study was con- ducted. The report was essentially finished in April 1979. The TVA had a complete draft in hand before the end of spring of 1978, and earlier access to much of the analysis. Also, it should be noted that during 1977-78, those of us working on the study were trying to take aim on at least two moving targets. rfhe first was the energy market. The second moving target we faced was the TVA itself. During the course of the GAO study, the member- ship of the Board of Directors changed, and TVA energy policy shifted from a unidimensional emphasis on large nuclear plants to open consideration of numerous energy supply-and-demand options. Many of the programs T~A initiated during 1978 were recommended in the GAO report. It is probably of little value to argtte which of TVA's new programs are due to GAO efforts and which were due to TVA's new leadership. Rather, what appears to me to be significant is the fact that the vision of TVA as a national energy demonstration agency found in the GAO report can be seen to some extent in practice today in the operations of TVA. Now, I'd like to draw just three brief conclusions. First, since the GAO report contains no load forecasts-no load forecasts other than those prepared by TVA-it is incorrect to imply that the GAO report says TVA has overestimated future electric energy demand. As I've indicated, alternative projections of future demand appear in the GAO report for the purpose of providing a context within which to evaluate energy supply-and-demand demonstration options. CREATE PANEL TO ASSIST IN EVALUATION pRocEss One of the recommendations of the GAO study was that ~ pre- pare several alternative load forecasts. The 1979 ~1IVA load forecast contains seven alternatives, up from four last summer. In addition to the TVA forecasts, there appear also to be several non-TVA forecasts and projections in print. With so many available~ it would seem that our attention should now turn to evaluating the validity of the assump- tions underlying the various forecasts and projections, and the sensi- tivity of power demand to changes in the values of key variables. TJltiniately, probabilities and weights must be attached to different values of the key parameters. I would go so far as to recommend that TVA create a panel of experts on regional growth, energy prices, and other important factors to assist in this evaluative process. Such a panel, consisting of both TVA and non-TVA personnel, could be made an integral part of the load forecasting process of the future. PAGENO="0028" 24 TVA REQUEST FOR INCREASED BORROWING AUTHORITY JUSTIFIED Second, it would appear that uncertainty regarding future demand growth, inflation, and the. lag involved in bringing new capacity online leads to a conservative approach in forecasting loads and financial requirements. In other words, in its planning process, TVA will mini- mize risk by leaning toward the higher growth load forecasts and assuming relatively high inflation rates. Such risk-minimizing be- havior may well be optimal under today's energy market conditions. It also implies, however, that TVA's request for increased borrowing authority may well be. justified. Personally, I see no danger in increas- ing this authority to $30 billion. ARE GAO RECOMMENDATIONS OUT OF DATE? Finally, the question arises, is the GAO report "out of date"? I don't think so. Of course, the two GAO projections can be called out of date in the sense that the energy market has moved on since 1977. But how out of date can these projections be when the current TVA load forecast presents energy demand growth rates both above and below the GAO projections? Certainly it cannot be argued that the GAO recom- mendations on energy supply-and-demand demonstration programs are out of date. Prior to the official publication date of the GAO re- port, TVA initiated work in many of the areas recommended by GAO. Implying tha.t the GAO report is out of date therefore represents an indictment of many of TVA's newest and most exciting programs. Thank you. Senator SASSER. Thank you, Dr. Bohm. PREPARED STATEMENT OF DR. ROBERT A. BOHM, DEPARTMENT OF FINANCE, AND ASSOCIATE DIRECTOR, ENVIRONMENT CENTER, TTNIVERSITY OF TENNESSEE FUTuRE ELECTRIC ENERGY DEMAND IN TilE TENNESSEE VALLEY AuThoRITY POwER SERVICE AREA My name is Robert A. Bohin and I am currently Professor of Finance and Asso- ciate Director of the Environment Center at the University of Tennessee (UT). During the past eight years, I have been engaged in research on the topic of en- ergy supply and demand as well as on the related topic of the envirqnmental im- pact of energy production. During 1977-78, along with several of my colleagues at the University of Tennessee, I worked on the United States General Account- ing Office's (GAO) evaluation of Tennessee Valley Authority (TVA) power program. The GAO report entitled "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority" was issued on November 29, 1978. The involvement of the University of Tennessee faculty and staff was greatest in chapters four through seven of the report. These chapters contain the analysis of future energy demand in the TVA region and consideration of alternative supply strategies for nieeting projected demand. Also included in these chapters are evaluations of several proposed energy denionstration programs that would affect both the de- mand and supply side of the energy equation. In my remarks today, I would like to address several issues raised by the GAO study. First, I will review several alternative projections of energy demand now available for the TVA region and discuss their meeting for future energy supply and the financing of TVA demonstration programs. Second, I will corn- memit briefly on the relationship of these demand projections to the possible neces- sity of raising TVA's borrowing authority from $15 billion to $30 billion. Finally, I will comnient on my understanding of the rationale behind the GAO study of TVA power programs and the current relevance of the findings of the study. Let me emphasize that time statements that I will he making are my own opinions ani do not represent the position of GAO or the University of Tennessee. PAGENO="0029" 25 PR0~1ECTI0NS OF ENERGY DEMAND AND SuPPLY Two of the principal objectives of the GAO study were (1) to evaluate the feasibility of TVA undertaking several national demonstration projects for emerging energy technologies and (2) to establish grounds for financing these demonstrations out of power revenues or alternatively by means of appropriated funds. Until the summer of 1978, TVA provided only a single load forecast. The GAO demand projections were prepared to provide a context within which to con- sider alternative supply strategies and demonstration proposals. In this way, we were able to interject into our analysis the high degree of uncertainty that ex- isted over the future course of electric energy demand. Proposed demonstrations of emerging technologies or conservation programs could then be more properly evaluated against scenarios of high and low energy demand. Three projections of demand through the year 2000 were presented in the GAO report. The existing TVA forecast was taken as a representative high projection. Two lower "GAO" projections were prepared. Let me briefly review how these projections were made: (1) For federal demand, the projections provided by the Department of Energy to TVA were taken as given. (2) For residential demand, the Oak Ridge National Laboratory (ORNL) Residential Energy Model was adapted to the TVA region. (3) For commercial and industrial demand, an aggregate economic model was developed and estimated especially for the GAO study. The two models were capable of projecting future energy demand based on assumed rates of change in energy prices and regional economic growth. In addi- tion, the ORNL model contained so-called engineering variables that allowed direct estimation of National Energy Plan impacts on TVA residential power demand. The GAO "high" demand projection was based on relatively rapid economic growth, no increase in the real price of electricity and ineffective conservation programs. The GAO "low" projection assumed lower economic growth, an increas- ing real price of electricity, and increased efficiency in the use of power. Table 1 contains data on the implicit compound growth rates of electric energy demand in the TVA region presented in the GAO study and compares these with the TVA January 1979 Load Forecast. These data illustrate two important points. First, all projections show a slowing down of demand growth over time. Thus, to com- pare any projection in the GAO report through the year 2000 with the current TVA load forecast is somewhat misleading because the TVA forecast concentrates on the period to 1990 and thereby excludes the slow growth 1990-2000 decade. The second point has to do with the vast array of alternative load forecasts now pro- duced by PVA. (one of the major recommendations of the GAO report was that TVA prepare multiple forecasts). A careful reading of table 1 will reveal several of the 1979 TVA forecasts are lower than the GAO low projection. TABLE 1.-IMPLICIT COMPOUND GROWTH FOR ELECTRIC ENERGY DEMAND IN THE TVA REGION [In percent) Without With Federal Federal purchases purchases A. GAO study projections: 1. From 1975 to 2000: TVA (1977) GAO High GAO Low 2. From 1975 to 1992: 4. 8 4.3 2.7 4. 5 4.0 2.7 TVA (1977) GAOHigh - GAOL0w 4. 5 4.0 2.7 4.7 4.3 3.4 3. From 1992 to 2000: TVA (1977) GAO High GAOLow B. TVA January 1979 Load Forcast: 1. From 1979 to 1990: 3. 4 3. 2 1.3 2.9 2.7 1.0 High Midrange Low~_ 2. From 1990 to 2000: 4.5 1.8-3.6 1.0 5.1 2.8-4.3 2.2 High Midrange Low... 4.8 1.84.2 .8 4.1 1.4-3.5 .6 Source: "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority." Report to the Congress by the Comptroller General, Nov. 29, 1978, p. 4 and 5; and January 1979 Load Forcast, Tennessee Valley Authority. PAGENO="0030" 26 Turning to the supply side, we adopted as a baseline objective the meeting of projected demands at minimum cost. Utilizing linear programming techniques, it was then quite simple to construct minimum cost supply scenarios for each demand projection. Largely because of the favorable TVA load configuration, our supply side analysis was largely confined to finding the least cost methods of meeting baseload requirements. It was concluded that nuclear systems would be the least expensive through the mid-lOWs with coal-based fluidized bed systems cheapar thereafter. It was from our supply side analysis that the conclusion was reached that if the low demand projection proved correct, then TVA might not need additional gen- erating capacity before the year 2000 beyond those plants under construction or planned (i.e., beyond the Yellow Creek Plant). Perhaps this conclusion can best be put in proper perspective with a quote from the UT Environment Center's report to GAO entitled, "The reader should be kept aware constantly that none of the [demand] projections presented have any claim to superiority or likelihood. Each is based on a different set of plausible assumptions about what the future will bring. The authors have attempted to keep their analysis free of their own personal feelings and biases, for the implications of being wrong are enormous in either direction. If the TVA projections are accepted as the basis for planning capacity additions, and one of the lower projections proves closer to the mark, valuable and scarce resources could be wasted. Or~ the other hand, if one of the lower projections is accepted and proves too low, crash efforts or critical short- ages could result." With demand projections and minimum cost supply scenarios in hand, it was then possible to evaluate proposed energy demonstration programs and consider alternate methods of financing them. Proposed demonstrations that raised the cost to TVA rate payers above the minimum cost scenarios and also exceeded the direct benefits to residents of the region were clearly candidates for financing via the appropriations route. Demonstrations that yielded benefits to residents of the region or did not raise power costs might legitimately be funded out of power revenues. Clearly, a demonstration of an advanced energy supply technology must be evaluated differently under conditions of low and high projected energy de- mand. For example, with high demand a demonstration will yield needed power afid merely replace some alternative production systems. Under such conditions a direct benefit accrues to the rate payers and hence It would seem appropria,te to employ power revenue financing for part of the cost of the demonstration. In the case of low demand, additional generating capability would not be needed and hence from the point of the TVA system, the demonstration would create excess capacity. Obviously, in this latter case, heavier reliance on ~appropriated funds would be the desirable financing alternative. FUTURE DEMAND AND TVA BORROWING AUTHORITY WithoUt careful analysis of the TVA's financial projections, it is impossible for me to state exactly bow much borrowing authority I believe is needed in the fUture. However, even without being able to pinpoint an appropriate debt ceiling, several important issues raised by the request to increase the limit to $30 billion can be addressed. First, let us dispense with the notion that unused borrowing authority will somehow burn a hole in PVA's corporate pocket and lead to construction of un- needed powerplants. TVA borrows money to finance capital outlays on new ca- pacity required to meet projected demand. This chain of causation cannot be reversed. Investors that purUhase TVA power bonds expect to receive both inter- est and eventual repayment of principal. These cash flows to investors are derived from TVA power revenues. Idle capacity does not produce revenue and as a result TVA's ability to meet its interest and principal repayment obligations would be called into question. Only if TVA could raise rates at will and with complete dis- regard for the cost of production, would it perhaps be possible to market bonds to finance unneeded capacity. I doubt that the electricity consumers of the TVA region or the Oongress would permit such irresponsible fiscal behavior to eon- tintve for very long. To summarize, therefore, even if TVA wished to construct unneeded powerplants, great difficulty would be encountered financing them even in the presence of unused borrowing authority. The TVA's actual need to issUe dUbt must be tied to projections of the future demand for electricity and the expected future cost of capital equipment. Projec- tions such as the GAO low demand projection imply little need for additional ca- pacity beyond that already licensed or under construction. The first question PAGENO="0031" 27 that must be answered, therefore, is with low demand growth would TVA need additional borrowing authority? Under conditions of low `demand growth, TVA has two options: (1) complete already planned facilities on schedule and undertake little or no new construction in `the 1990's; or (2) extend the construction schedule of already planned facilities into the 1990's. Since TVA is required to have bonding authority to cover its financial obligations, the second option could lead to higher debt requirements as obligations from earlier years are extended and layered on top of those com- mencing in later years. Under either option, however, `the key factor that might lead to a need for higher `borrowing authority is inflation. The TVA must make its financial plans in terms of nominal dollars rather than real or deflated dollars. As a result, some assumption as to the future rate of inflation must be made. The higher the rate of inflation assumed by TVA, the more likely is a request for ad- diti'onal borrowing `authority `at an early date. What about the ease where demand is above the low levels indicated by pro- jections suc'h as the GAO low projection? The `TVA would have to plan for addi- tional new on-line capacity in the early 1990's and financial obligations would begin in the 1980's. It should also be mentioned that the various national demon- stration programs TVA is proposing to undertake, to the extent they are funded out of power revenues, will draw upon TVA's borrowing authority to meet capital expenditures. In conclusion, we can state that if TVA is at or near its current debt ceiling of $15 billion, there are good reasons for believing that additional borrowing authority will be needed in the early 1980's. Two factors that would lower the pressure on TVA's debt ceiling are lower power demands and a low rats of inflation. A third possibility might revolve around heavier reliance on supply system that have a relatively short construction period (as with indus- trial cogeneration )`. With conventional coal or nuclear baseload plants, de- cisions to build must be made 10-42 years before any power will actually come on line. As a hedge against the risk of having too little productive or financial capacity. planners are likely to overstate the energy demand growth rate and the assumed inflation rate. If the construction lag could be cut to five years, projections would have a somewhat higher degree of certainty about them, and upward biases resulting from a long 10-42 year planning horizon might be reduced thereby cutting the projected need for borrowing authority. RELEVANCE OF THE GAO STUDY It has always been my opinion that the rational behind the GAO study was to present a case for establishing a role for TVA as the principal national demon- stration agency in the energy field. It was felt at the onset of the study that this traditional TVA function had atrophied over the years almost to the point where it was difficult to distinguish TVA from a private power company. The current validity of the findings and conclusions of the GAO report must be viewed within the time frame in which the study was conducted. The ma- jority of the work performed at UT was completed prior to the end of 1977. The report itself was essentially finished by April 1978. The TVA had a complete draft in hand before the end of spring, 1978 and access to much of the analysis at earlier dates. Also, it should be noted that during 1977-78, those of us working on the study were trying to take aim on at least two moving targets. The first was the energy market itself. Demand parameters and elasticities were changing rapidly and new information on price trends, costs of emerging technologies, etc. appeared almost daily. It was clear that with so much flux in the market, no 25 year demand forcast could stand the test of time. As a result, we eschewed compet- ing with TVA in the area of load forcasting and confined ourselves to pre- paring a set of projections within which energy supply and demand demon- stration programs could be evaluated. The second moving target we faced was the TVA itself. During the course of the GAO study, the complexion of the Board of Directors changed drastically, a new chairman was appointed and a new general manager named. The TVA energy policy shifted from a uni-dimensional emphasis on large nuclear plants to open considqration of numerous energy supply and demand options. Many of the programs that TVA initiated during 1978 are recommended in the GAO re- 1 This point e~as suggested to me by William U. Chandler of the UT Environment Center. PAGENO="0032" 28 $ port. It is probably of little value to argue about which of TVA's new directions are due to GAO's efforts and which to TVA's new leadership. Rather what ap- pears to be truly remarkable is the fact that much of the "vision" of TVA as a national energy demonstration agency found in the GAO report can be seen in practice in the operations of TVA today. CONCLUSIONS Several conclusions can be drawn from the preceding discussion. First, since the GAO report contains no load forcasts other than those prepared by TVA, it is incorrect to imply that the GAO report says TVA has over-estimated future electric energy demand. Alternative projections on future demand appear in the GAO report for the purpose of providing a context within which to evaluate energy supply and demand demonstration options, and because TVA provided but a single forecast at that time. One of the recommendations of the GAO study was that TVA prepare several alternative load forecasts. The January 1979 TVA load forecast contains seven alternatives. In addition to the TVA forcasts, there appear also to be several non-TVA forecasts and projections in print. With so many available, it would seem that our attention should now turn to evaluating the validity of the as- sumptions underlying the various forecasts and projections and the sensitivity of power demand to changes in the values of key variables. Ultimately, probabil- ities and weights must be attached to different values of the key parameters. I would go so far as to recommend that TVA create a panel of experts on regional growth, energy prices and other important factors to assist in this evaluative process. Such a panel, consisting of both TVA and non-TVA personnel, could be made an integral part of the load forecasting process in the future. Second, it would appear that uncertainty regarding future demand growth, inflation, and the lag involved in bringing new capacity on line leads to a con- servative approach in forecasting loads and financial requirements. In other words, in its planning process TVA will minimize risk by leaning towards the higher growth load forecasts and assuming relatively high inflation rates. Such risk minimizing behavior may well be optimal under today's energy market con- ditions. It also implies, however, that TVA's request for increased borrowing authority may well be justified. Personally, I see no danger in increasing this authority to $30 billion. Finally, the question arises, is the GAO report "out of date"? I don't think so. Of course, the two GAO projections can be called out of date in the sense that the energy market has moved on since 1977. But how out of date can these projections be when the current TVA load forecast presents energy demand growth rates both above and below the GAO projections? Certainly it cannot be argued that the GAO recommendations on energy supply and demand demon- stration programs are out of date. Prior to the official publication date of the GAO report, TVA initiated work in many of the areas recommended by GAO. Implying that the GAO report is out of date therefore represents an indictment of many of TVA's newest and most exciting programs. TVA AS A NATIONAL ENERGY DEMONSTRATION MODEL Senator SASSER. There are two or three points that you touched on that I'd like to pursue just very briefly. One, you made what I thought was a very interesting observation that the General Accounting Office report had as one of its aims to bolster a project to make TVA the national energy demonstration model, if I understood you correctly. Could you elaborate on that? Dr. .B0HM. Well, that might have been my interpretation of the aim of the study. Senator SASSER. Did it come out the way it was intended to come out, do you think? Dr. BOHM. Generally, I think it came out that way. My interest in the study was to essentially see if this was a good idea, I guess, and evaluate to what extent it would be feasible for TVA. to play such a role. PAGENO="0033" 29 COST OVEERtINS Senator SASSER. You mentioned in your prepared statement the cost overruns at some of the nuclear plants. You indicated that you might have some ideas on how these cost overruns could be held to a minimum. Would you elaborate on that for us? I think we'd 1±nd that very interesting. Dr. BOHM. I don't think that was in my statement, Senator. Senator SASSER. Somebody called that to my attention that it was in your statement. Do you have any ideas along that line? ENVIRONMENTAL STIPULATIONS EFFECT ON COST OVERRUNS Dr. BOHM. My opinion on cost overruns is it has to do, really, with the rate of inflation you assume in your original cost projections, and there you're sort of guessing. If the rate of inflation turns out to be higher than you've projected then you'll have a cost overrun which is riot a cost overrun in real terms, it's an imaginary one. The other place where cost overruns could cause serious problems would be if, in fact, the licensing regulations changed during the course of construction or planning, and the agency, for example, was required to meet new envi- ronmental stipulations. This would increase the cost of constructing the project over what was originally projected. In that case though, you can't have your cake and eat it too. If you want environmental protec- tion you have to be prepared to pay for it. GAO AND TVA DISAGREE ON INDUSTRIAL AND COMMERCIAL DEMAND FORECAST Senator SASSER. All right. In assisting in the preparation of the GAO report there was some conflict between GAO and TVA with regard to industrial and commercial demand forecasts. Now, overall GAO's high growth forecast indicates less demand for electricity, than does the TVA forecast; yet in the industrial and commercial sector the high growth forecast of GAO is higher than TVA's, and I think you predict a demand of 177.8 billion kilowatt-hours in the year 2000, while TVA projected 169 billion. Now. why would you predict the use of more electricity in the commercial and industrial sector than TVA would, and at the same time project a lower overall need for additional electricity. I)r, BoirM. Perhaps I should start by pointing out that in the resi- dential projection of the GAO report we had at our disposal the very sophisticated model that Dr. Hirst has just described, In the in- dustrial and residential area we had no such sophisticated model. What we had to do was prepare some method of projecting demand in that sector. We put together a fairly simple econonhie model to do this; model in no way as sophisticated for example as the one that TVA was developing at the time. I felt comfortable in doing this because I knew I wasn't preparing a load forecast, but merely a projection within which we could ei~ihu- ate overall proposals for national demonstrations and so forth. The only reason our numbers are higher than their numbers is that's the way they cane out. There was no sophisticated reason one way or the other. 45--720-79---3 PAGENO="0034" 30 Senator SASSER. Well, thank you, Dr. Bohm. Who do you wish to call on next, Mr. Moore? Mr. MOORE. Well, Senator, it's clear both Dr. Hirst's efforts and Dr. Bohm's efforts went into the GAO report. We thought that it might be' helpful for you to have some estimates that were done independently of both the GAO and TVA. Senator SASSER. Yes, it would be helpful. Mr. MOORE. So, we have two panelists who will address themselves to that. Fortunately, there is an effort going on at the University of Tennessee, a continuing effort, that has to do with estimating energy needs for Tennessee, and Dr. Goolsby will speak to that, and then we will turn to some broader estimates for the valley area as a whole, to which Mr. Carismith will speak. Senator SASSER. Dr. Goolsby. STATEMENT OF WILLIAM C. GOOLSBY, ASSOCIATE PROFESSOR OP FINANCE AND DIRECTOR, TENNESSEE ECONOMETRIC MODEL, UNIVERSITY OP TENNESSEE Dr. GOOLSBY. This testimony was prepared by myself and Dean Moore. Since Dr. Moore is an expert in the energy area, I asked him to assist me. My primary responsibility is forecasting the State's economy, pri- marily through the Tennessee econometric model. Our primary re- sponsibility in the center for business and economic research is to pre- pare reports for the State government, and for private agencies within the State to give them some idea of the future shape of the State's economy for budgeting and planning. We've prepared several reports in that regard, including four eco- .nomic reports to the Governor of the State, and two reports on energy resources and requirements within the State, and special purpose re- ports such as a report to the State government on the expected impact of the coal strike last spring. I will skip over most of my testimony here and give you the gist of it. Senator SASSER. I might say, Dr. Goolsby, that your testimony will be incorporated in its entirety in the record. Dr. GooLsgr. Thank you. Senator SASSER. We'd appreciate a summary. TENNESSEE AND NATIONAL ECONOMIES Dr. GooLsBY. The forecast that I made, of course, is not represent- ative of the entire TVA area, since we only forecast for the State of Tennessee. At the present time we're anticipating a period of rela- tively slow growth for the United States and the State economies through 1985. We're expecting the rate of growth of the national econ- omy to slow down during the last half of this year in response to the current restrictive monetary policies of the Federal Reserve Board and the efforts of the executive and legislative branches to reduce the Fed- eral deficit. We're expecting slow growth of around 1.5 to 2.25 percent for the State's economy, that is Tennessee's economy, in 1979, 1980, and 1981. After that we're expecting moderate growth rates of 3 to 3.5 percent PAGENO="0035" 31 through 1985, as the National Government continues to exercise re~~ straint in an attempt to maintain the stability of the dollar and to con- trol the forces of inflation. This slower growth is expected to result in a slower rate of job for- mation than we have experienced during the last decade, and we're anticipating this rate of growth in jobs will impact on our population growth rate, and slow it down during the period from now until 1985. We have developed a sector of the State's econometric model that represents energy demand that includes a number of mathematical equations that attempt to predict the level of energy useage within the State, including that of electricity. ~i~omicrry CONSUMPTION AND PRICE PROJECTIONS Table 2 in our testimony shows the projection for electricity sector consumption, and price data through 1980 and 1985. We made this forecast for 1975 to 1985 to make it comparable with the GAO report, although we have not made any direct comparisons, This projection is based on our December 15, 1978, forecast by the Tennessee econo- metric model. We're forecasting a compound rate of growth, as shown in table 3 pf the testimony, of 3.1 percent per annum, in electricity consumption from 1975 through 1985. In terms of subsectors the estimates are: for residential consumption, 2.2-percent growth; commercial consump- tion, 3-percent growth; and industrial consumption, 4.2-percent growth. Also we're estimating about a 10-percent compound rate of increase in electricity prices over the 10-year period with rather neg- ligible variations in price increases among the subsectors. ANNUAL RATE OF GROWTH Also from table 3, we are anticipating a decline in the rate of growth of electricity consumption between 1980 and 1985 relative to the ear- lier 5-year period.. This lower growth rate is primarily a result of an expected slower average growth rate i.n the State's economy in the later period. The year 1975 was a recession year and our output was, at that time, considerably lower than the prerecession level achieved in 1973. Consequently, we've had a rebound effect in the last few years~ Since 1975, we have experienced 3 years of rapid growth in gross State product of 7.8 percent in 1976, 5,5 percent in 1977, and 3,5 percent in 1978. Combining these relatively rapid rates with the slower rates expected in 1979 and 1980, we still expect to average better than 4 pe.rcent per annum over the 5-year period. From 1980 to 1985, however, we expect to average about 3-percent growth per annum. Consequently, we would not expect the rate of growth in electric consumption to be as great in the later period. ELASTICITY OF DEMAND FOR ELECTRICITY Finally, table 4 shows the elasticity of demand for electricity with respect to price and increases in real output or personal income. In general, we expect a i-percent increase in State output to increase electric consumption by 1.6 percent. However, this increase in' con- PAGENO="0036" 32 sumption will be tempered by price increases, since a 1-percent in- crease in price will result in a decline in electricity consumption of about one-half of 1 percent. Thus, the interaction of these two factors, price increases, and increases in real output determine the rate of growth of electricity consumption. In swnmary, we would like to emphasize the following points: NATIONAL AND STATE ODTLOOK TO 1985 First of all, we expect the national rate of growth to slow down, and `we expect the State rate of growth to follow that slowdown. We antici- pate that real growth will average 3.6 percent per year over the 1975 to 1985 decade for State output, and we find this consistent with a growth in electricity consumption of 3.1 percent when price increases are taken into account. Indeed, as far as total energy consumption is concerned, there has been some "uncoupling" of growth in real output and energy inputs in Tennessee since 1970 due to price increases, and we expect this to continue in the future. Net energy consumption per dollar of real gross State product fell by 8 percent between 1970 and 1975, and we estimate a further 16-percent decline in this figure for the decade ending in 1985. IMPACT OF COAL ON ENERGY PRICES Second, we are anticipating that energy prices will continue to rise at a pace considerably in excess of increases in the general price level. Our figures suggest a 10-percent average rate of increase in eleetrity prices, while the deflator for gross State product is expected to increase at a rate of about 6 percent during the 1975 to 1985 decade. Coal prices play an important role in our forecasts of electricity prices. In light of the United Mine Workers and BCOA labor agreement signed a year ago which calls for further rounds of substantial wage increases, and the fact that higher costs of surface mining associated with full compliance with the Surface Mine Act of 1977 have probably not been fully factored into the price of coal, there is intuitive support for the notion that electricity may continue to become more expensive relative to a representative bundle of other goods and services. Of course, as we move toward 1985, more of the electricity produced in Tennessee will come from nonfossil sources, and other factors may be of greater importance in explaining the price of electricity toward the end of the period. INTERPRET PROJECTIONS WITH A DEGREE OF CAUTION Third, as a final matter, we must urge that these projections be interpreted with some caution. The methodology of econometric model building for Tennessee has great strength to the extent that develop- ments in this region are linked to the national economy, and to the extent that a requirement for internal consistency is imposed. There are limitations, however, and Mr. Hurst brought out one of those in his testimony here in that changes in technology that may occur in the future are, of course, ~iot factored into this. The first thing that we use to forecast the future is our knowledge of the past, and past relation- ships are first modeled in the econometric model. Then after that we PAGENO="0037" 33 have to impose on the model forecasts any special knowledge that we may have about technological changes. Also, exogenous factors such as a prolonged interruption of oil imports from Iran, or a rapidly ex- panding national economy, which we do not expect, could upset our projections. Also it should be remembered that these forecasts are based on historical structural relationships, some of which may have changed in recent years. We do, however, believe the underlying methodology is sound and that the forecasts can, properly qua1ifie~d, be of value in a wide range of applications. Furthermore, the forecast is for the State of Tennessee alone, and it may not be completely rep- resentative of the entire TVA region. Thank you. Senator SASSER. Thank you, Dr. Goolsby. [Dr. Goolsby's statement follows:] PREPARED STATEMENT OF WILLIAM C. GOOLSBY, ASSOCIATE PRO. FESSOR OF FINANCE, AND DIRECTOR, TENNESSEE ECONOMETRTC MODEL, UNIVERSITY OF TENNESSEE; AND JOHN H. MOORE, AS SO- CIATE PROFESSOR OF ECONOMICS, UNIVERSITY OF TENNESSEE The Tennessee Econometric Model is an annual forecasting and simulation model for the state of Tennessee based upon the historical trends in the Tennes- see economy relative to the national economy. It is a system of 192 mathematical equations that are solved simultaneously to provide a comprehensive and con- sistent forecast of state economic activity. This forecast for the state's economy relies on a prior forecast of the natoinal economy prepared by Wharton Econometric Forecasting Associates, Inc. As you are undoubtedly aware, Wharton forecasts have a reputation for accuracy and reliability that is unequaled. Consequently, we do not attempt to duplicate their expertise at the national level. Instead, we concentrate on the state economy and attempt to forecast the deviations about the national trend that occur at the state level. TENNESSEE ECONOMETRIC MODEL The Tennessee Econometric Model has been utilized for many important studies of the state's economy during the past five years. We have produced four economic reports to the governor of the state on the state's economy and prospects for growth. These reports are widely used in state government for planning and budgeting. The model has been used to project state expenditures and receipts to deter- mine the need for tax increases. Two studies of state energy requirements and resources have been completed. Other special purpose studies have been accom- plished, such as the report to state government on the expected impact of the coal strike in the spring of 1978. In addition, the forecasts have provided a basis for other studies by both public and private agencies. TENNESSEE AND NATIONAL ECONOMIES Tennessee's economy is quite different from the national economy in many respects. Perhaps the most significant difference is our heavy reliance on manu- facturing. While Tennessee's economy is not as strongly dominated by maiiufac- turing as some states such as Michigan or Ohio, manufacturing does constitute a larger percentage of total output In Tennessee than In the average state. In 1978, manufacturing comprised 35.9 percent of Tennessee's output and 24.7 percent of the national output. Furthermore, Tennessee's growth rate has been considerably above that of the nation during the past decade, 3.8 percent real growth versus a national rate of 2.8 percent real growth In ouptut and a 4.2 percent real growth in total personal income versus a national rate of 3.4 percent. This more rapid growth can be attributed to the quality and discipline of the labor force, lower average wages, lower taxes, lower energy costs, and the favorable location of the state between the industrialized areas of the Northeast and Midwest and the rapidly growing southern states. PAGENO="0038" 34 On the other hand, there are factors that contribute to a lower per capita income in Tennessee that are expected to persist. In 1976, Tennessee's per capita income was 83 percent of the national per capita income. The factors contrib- uting to the lower per capita income are identified in Table 1. Tennessee has a higher percentage of people with less than high school educa- tion, a higher percentage of black people, a higher percentage of female-headed households, a higher percentage of elderly people, a higher percentage of people living outside metropolitan areas, a lower percentage of people employed in durable goods manufacturing, and a lower percentage of people over 14 who are employed than the average for the United States All of these factors would tend to predict a lower per capita income. Tennessee does have a higher percentage of the population over 14 employed in manufacturing, but this employement is concentrated in the lower-paid non- ~durable manufacturing area and therefore tends to produce a lower per capita income. These factors lead us to conclude~that it is unlikely that Tennessee will achieve a per capita income equal to the national average unless there is a dramatic change in these demographic and economic characteristics. Since it is unlikely that such a change will occur, we anticipate that the rate of growth in Tennessee Output and income per capita will tend to converge with that of the nation so that future increases in total state output and income above national rates will largely depend on population growth rates in excess of the national average. Some improvement in per capita income relative to the national average may occur as our labor force participation rate increases and wages and salaries are brought closer to the national average of per capita income, but we do not expect to equal or exceed the national average in the foreseeable future. Since 1970, we have experienced an in-migration that has given the state a higher than average population growth rate. This phenomenon appears to be continuing and we anticipate that it will continue through 1980. Thereafter, we ~tnticipate a decline in the rate of growth of population that will result in Ten- nessee achieving a rate of growth of output that is greater than the national rate but not by a large amount. Our studies indicate that population growth is strongly affected by the rate of growth of employment. Relatively good employment opportunities tend to draw pop'ulation from other states, while a poorer job growth rate will lead to a declin- ing share of the U S population The anticipated slowing of the state's economy in the latter half of 1979 and slow growth in 1980 and 1981 will adversely affect the creation of new jobs. By 1981, we anticipate that this will have an impact on the rate of growth of Ten- nessee's population.. THE NATIONAL AND STATF~ OUTLOOK TO 1985 We are anticipating a period of relatively slow growth for the U.S. and state economies from now through 1985. We expect the rate of growth of the national economy to slow during the last half of 1979 in response to the current restric- tive monetary policies of the Federal Reserve Board and the efforts of the execu- tive and legislative branches to reduce the federal deficit. Slow growth (of around 1.5 to 2.25 percent) is then expected for the state's economy in 1980 and 1981. Thereafter, we expect moderate growth rates of 3 to 3.5 percent through 1985 as the national government continues to exercise re- straint in an attempt to maintain the stability of the dollar and to control the forces of inflation. This slower growth is expected to result in a slower rate of job formation than we have experienced during the last decade, and we anticipate that our rate of growth in population will fall below the national average as it did during the 1950 and 1960 decades. ENERGY DEMAND AND THE STATE'S ECONOMY In light of increased concern over the role of energy in the economy, an energy sector was developed as an integral part of the Tennessee Econometric Model (TFM) This portion of the model involves some 31 equations designed to fore cast: (1) energy use measured in conventional units, (2) energy use measured in common units (BTU's), and (3) energy prices. Consumption and prices are estimated for the following subsectors: electricity, gas, coal, gasoline and fuel PAGENO="0039" 35 oil. The electricity and gas sectors are further snb-divided into residential corn- mercial and industrial categories. The variables which enter into the electricity consumption and price equations are as follows:' Dependent variables: Total electricity consumption (excluding direct sales and sales to federal installations). Residential electricity consumption (TECRES). Commercial electricity consumption (TECC). Industrial electricity consumption (TECI). Average price of electricity. Residential electricity price (TEPRES). Commercial electricity price (TEPC). industrial electricity price (TEPI). Independent variables: Sum of residential consumption, (TECRES) commercial consumption (TECC), and industrial consumption (TECI). Residential electricity price (TEPRES), residential gas price (TTGPRES), personal income (TPYOO1) and U.S. personal consuraption deflator (UDPC). Commercial electricity price (TEPC), gross state product (TGSP). Industrial electricity price (TEPI), industrial gas price (TTGPIND), gross state product (TGSP), industrial electricity consumption in the previ- ous period. Weighted average based on subsector prices (see below) and sector consumption (see above). Coal price (TCPR), residential electricity consumption (TECRES), residential electricity price in previous period. Coal price (TCPR), commercial electricity consumption (TECC), com- mercial electricity price in previous period. Coal price (TCPR). The forecasting equations for each of these dependent variables (and the asso- ciated statistics) are reported in Appendix I. In all cases the value of the co~ efficient of determination is .980 or better. Electricity sector consumption and price data for 1975 with projections to 1980 and 1985 are shown in Table 2. This projection is based on the December 15, 1978 forecast of TEM discussed above. We forecast a compound rate of growth (as shown in Table 3) of 3.1 percent in electricity consumption from 1975 to 1985. In terms of subsectors, the estimates are: residential consumption, 2.2 percent growth; commercial consumption, 3.0 percent growth; and industrial consumption, 4.2 percent growth. As can be seen from the table, we are estimating about a 10 percent compound rate of increase in electricity prices over the ten- year period. Among the subsectors, the variations in the rate of price increase are negligible. It is apparent from Table 3 that we anticipate a decline in the rate of growth of electric consumption between 1980 and 1985 relative to the earlier 19Th to 1980 period. This lower growth rate is primarily a result of an expected slower average growth rate in the stat's economy in the later period. The year 1975 was a recession year and our output level was, at that time, considerably lower than the pre-recession level achieved in 1973. Since 1975, we have experienced three years of rapid growth in GSP of 7.8 percent, 5.5 percent and 3.5 percent. Combining these rapid rates with the slower rates expected in 1979 and 1980, we expect to average better than 4 percent per annum over the five-year period. From 1980 to 1985, we expect to average about 3 percent growth per annum. Consequently, we would not expect the rate of growth in electric consumption to be as great in the later period. Table 4 shows the elasticity of demand for electricity with respect to price and increases in real output or personal income. In general, we expect a 1 percent increase in state output to increase electricity consumption by 1.6 percent. How- ever, this increase in consumption is tempered by price increases, since a 1 per- cent increase in price will result in a decline in electricity consumption of about one-half of 1 percent. 1 Unless otherwise Indicated, variables represent Tennessee data. PAGENO="0040" 36 CONCLUSIONS In summary we would like to emphasize the following points ~. We anticipate real growth (as measured by gross state product) of 3.6 per- cent per year over the 1975-1985 decade and find this consistent with a growth in electricity consuniption of 3.1 percent when price increases are taken into account. Indeed, as far as total energy consumption is concerned there has been some "uncoupling" of growth in real output and energy inputs in Tennessee since 1970 due to price increases, and we expect this to continue in the future. Net energy consumption per dollar of real GSP fell by 8 percent between 1970 and 1975, and we estimate a further 16 percent decline in this figure for the decade ending in 1985. 2 We are anticipating that energy prices will continue to rise at a pace con siderably in excess of increases in the general price level Our figures suggest a 10 percent average rate of increase in electricity prices while the deflator for gross state product is expected to increase at a rate of about 6 percent during the 1975-1985 decade. Coal prices play an important role in our forecasts of electricity prices. In light of the UMW/BCOA labor agreements signed a year ago which call for further rounds of substantial wage increase, and the fact that higher costs of surface mining associated with full compliance with the Surface Mine Act of 1977 have probably not been fully factored into the price of coal, there is intuitive support for the notion that electricity may continue to become more expensive relative to a representative bundle of other goods and services. Of course, as we move toward 1985 more of the electricity produced in Tennessee will come from nonfossil sources, and other factors may be of greater Importance in explaining the price of electricity toward the end of the period. 3 As a final matter we must urge that these projections be interpreted cautiously The methodology of econometric model building for Tennessee has great stiength to the extent that developments in tins region are linked to the national economy, and to the extent that a requirement for internal consistency is imposed. There are limitations, however. Exogenous factors (a prolonged inter- ruption of oil imports from Iran or a rapidly expanding national economy, for example) could upset our projections. Also, it should be remembered that these forecasts are based on historical structural relationships, some of which may have changed in recent years. We do, however, believe the underlying methodology is sound and that the forecasts can, properly qualified, be of value in a wide range of applications. Furthermore, this forecast is for the state of Tennessee alone and it may not be completely representative of the entire WA region PAGENO="0041" E ~ E a~ a- ~ 0_ o~ a a- ~ ~- 0~ >- C-) 0 I.- 0 LU 0 C-) a- C, C~) C') 0 I- C~) U- 37 C~4 LC) a) C~J LO 0) 0~ 05 00 LOS 0)0)0)0) ~ a) LOS 0)0) 000~ 0S~ L0 ~ LOS ~ LOS ~0- 0) ~ LOS LOS ~ Lb OSLO 05 C)) LOS ~ r~ 00 LOS Lg5 000005 LOS r-~ a ~ *~ :~ : ~- :~=~ E ~ 0) ~ t~ C')0)- .0) -~ ~ -~ E~- ~ E~.2 ~ ~ ~ 0) (/)00~ ~ 0) ~ C) -~ C') ~ S >- -~ .~ Fi~, E~ C') - ~ ~ z ~ PAGENO="0042" 38 1.45 53-76 1.48 51-75 1.54 51-75 TABLE 2.-TEM ELECTRICITY CONSUMPTION AND PRICE PROJECTIONS Variable 1975 1980 1985 1985÷1975 Electricity consumption, total (millions of kilowatthours) - 42, 686 52, 442 57, 964 1. 35~ Residential - 22, 038 25, 849 27, 289 1. 238 Commercial 3, 516 4, 330 4, 719 1. 342 Industrial 17, 133 22, 263 25, 956 1. 515 Electricity price, average (cents per kilowatthour) - 1.99 3. 47 5. 19 2. 608 Residential 2. 07 3. 58 5.41 2. 614 Commercial 2. 50 4. 35 6.37 2. 548 Industrial - 1.78 3.16 4.74 2.663 Source: Tennessee Econometric Model, Center for Business and Economic Research, College of Business Administration, the University of Tennessee, Knoxville. TABLE 3.-TEM ELECTRICITY CONSUMPTION AND PRICE PROJECTIONS AVERAGE ANNUAL RATES OF GROWTH [In percentj Period Variable 1975-80 1980-85 1975-85 Total electricconsumption 4.20 2.03 3.11 Residential 3. 24 1.09 2. 16 Commercial 4.25 1.74 2.99 Industrial 5.38 3.12 4.24 Average electricity price 11. 76 8.38 10. 06 Residential 11. 58 8.61 10. 08 Commercial - 11. 71 7. 93 9. 80 Industrial 12.16 8.45 10.29 Source: Tennessee Econometric Model, Center for Business and Economic Research, College of Business Administration, the University of Tennessee, Knoxville. TABLE 4.-ELASTICITY OF DEMAND FOR ELECTRICITY Variable Price Total personal income or gross State product in constant dollars. TECRES - -.4749 1. 6557 TECC -. 2612 -.6955 -. 5469 1. 3137 1. 6612 1. 6293 TECI Weighted average - Source: Tennessee Econometric Model, Center for Business and Economic Research, College of Business Administration, the University of Tennessee, Knoxville. APPENDIX 1.-ENERGY SECTOR FORECAST EQUATIONS FOR ELECTRICITY CONSUMPTION AND PRICE R-2 S.E. OW. Period (1) in TECRES=2. 8479-0. 4749 in (TEPRES/TTGPRES)+1. 6557 in (TPYOO1/UDPC)_.... 0. 985 0. 0696 (9. 721)(-5. 744) (37. 936) (2) in TECC=-4. 7711-0.2612 in TEPC+i. 3137 in TGSP .987 .0522 (-16. 308)(-3. 778) (41. 664) (3)1 in TECI= -6. 0566X(1. 0-0. 4729)-0. 2489 [in (TEPI/TTGPIND)-0. 4729 .996 .0398 (-7. 543) (2. 748)(-2. 237) (2. 748) in (TEPL1/TTGPIND-1)J-0. 3512 [DUMMEP-0. 4729 DUMMEP_IJ (-11.009) (2.748) ±1. 6612 [in TGSP*_0. 4729 in TGSP*_iJ+0. 4729 in TECL1 (29. 295) (2.748) (2.748) (4)1 in TEPRES= -0. 0585X(i. 0-0. 5875)+0. 6254 [in TCPR-0. 5875 in TCPR-LJ_.._ . 980 (-0.147) (3.567) (14. 937) (3.567) -0. 0970 [in TECRES-0. 5875 in TECRES$11+0. 5875 in TEPRES-.1 (-2.084) (3.567) (3.567) (5)1 in TEPC= 0. 1744X(i. 0-0. 5903)+0, 5092 [in TCPR-0. 5903 in TCPR_i) . 985 (0.604) . (3.536) (17. 889) (3.536) -0. 0843 [in TECC-0. 5903 in TECC-iJ+0. 5903 in TEPC-i (-2. 082) (3. 536) (3. 536) (6) in TEPI=-i. 4572+0. 7217 in TCPR .985 .0376 i.34 (-44. 802)(39. 172) 0356 1. 8i 56-76 .0250 i.6i 56-76 1 Equation corrected using Cochrane-Orcutt technique. Source: Tennessee Econometric Model, Center for Business and Economic Research, College of Business Administra- tion, the University of Tennessee, Knoxville. 53-76 PAGENO="0043" 39 APPENDIX I TVA. is the source for data on the consumption of electricity (measured in kilowatt hours) sold through its distributors and the average price paid by con- sumers. The consumption of electricity is divided into three categories: resi- dential, TEORES; commercial, TECC; and industrial, TECI. The price for these categories-residential, TEPRES; commercial, TEPO; and industrial, TEPI; are calculated by dividing the revenues received by category by the amount of consumption in that category. An average total price, TEPT, is also calculated. Excluded from the electricity data are direct sales by TVA and governmental sales. DTJMMEP is a dummy variable representing the inclusion of the Memphis area into the TITA power service area. PER CAPITA INCOME IN TENNESSEE Senator S~ SSER. Dr. Goolsby, there was one statement in your pre- pared statement that I wanted to ask you about. I'll read it. You say, "It is unlikely that Tennessee will achieve a per capita income equal to the national average." Dr. GOQLSBY. That's correct. There are certain factors within the State that indicate that our per capita income, although it's growing at a more rapid pace than that of the Nation, will not continue to grow at a more rapid pace, so that we will not exceed the national per capita average. Those factors are listed in table 1, which would indicate that we would probably have a lower per capita income continuously. Senator SASSER. Well, now, is our rate of per capita income increas- ing any faster than our sister States in the Sun Belt ~ Dr. GOOL5BY. I think probably not, Part of that's a base problem. Mississippi, for example, has the lowest per capita income in the Nation. Smaller absolute changes in per capita income are a larger percentage change for them, so when you have a smaller base, you would expect larger percentage changes. So, Tennessee is probably somewhere in the middle so far as the Southern States are concerned, with respect to the rate of growth of per capita income. Senator SASSER. Well, I would like to ask you what you think Tennessee should do to bring our per capita income closer in line to the national average, and how dependent do you think consump- tion of electricity is on per capita income? FACTORS AFFECTING PER CAPITA INCOME Dr. GooLsEY. Well, one of the factors that has led to more rapid growth in the State, I believe, is the lower cost of energy and the availability of energy. So, that is an important factor. Some other factors that contribute to a lower per capita income of the State are, first of all, the larger percentage of black people within the State, a lessening of the discrimination against black people in terms of employment and wage levels, would improve the per capita in- come of the State. Also, another factor is that the percent of the families headed by females in the State is higher than the national average. That would indicate that a lessening of discrimination against females in employment and wage levels would improve the per capita income within the State relative to the Nation. Also, the lower cost and availability of energy should lead to greater job PAGENO="0044" 40 opportunities, thereby increasing the labor force participation rate in the State. The labor force participation rate is currently that of the Nation, so that if we can have a larger percentage of our popula- tion employed, that would of course, increase the per capita income of the State relative to the Nation. Also, we could try to attract relatively high wage industry rather than low wage industry, and this would be an improvement. Mr. Mooiu~. I might just add, Senator, the one other factor that Dr. Goolsby didn't mention is education, and representing the uni- versity we would like to emphasize that role as well. Senator SASSER. Well, Dr. Moore, I appreciate you emphasizmg that. I might say that your colleagues in the administration at the mu- versity do an excellent job of emphasizing that with the political leadership not only on the State level but on the Federal level. Let me ask you one final question, Dr. Goolsby, as the quality of life increases in Tennessee and hopefully it will, and your prediction i-s it will although not dramatically. Three percent growth rate doesn't sound all that phenomenal to me. As the quality of life improves and per capita income continues to increase relative to what our per capita income is now, can't we expect a steeper increase in electri- cal consumption? PRICE KEY FACTOR IN CONSERVATION OF ELECTRICITY Dr. 000LSBY. Well, sir, I believe that the consumption of electricity is largely related to the price of electricity; and if the price of electricity rises more rapidly than the price of other goods, then people will economize on electricity. They will burn more wood, coal, and other fuels rather than electricity. The price of electricity is, I believe, the key factor in determining whether or not new technology will be brought to bear on the conservation of electricity and so on. I'm an- ticipating higher prices of electricity, and that is why I expect conservation. Senator SASSER. I notice that from your prepared statement. Of course, we can look at some figures which indicate that even with escalating electrical rates over the past 4, 5, 6, or 7 years, that con- sumption of electricity continues to go up fairly dramatically. What do we do, reach some golden mean where consumption falls off and we start looking for alternative sources? Dr. GOOLSBY. Well, sir, as I indicate in my prepared statement, there has been a decline in the use of electricity per unit of State out- put. The output of the State is increasing, and the population is in- creasing and so on and so forth, and we are experiencing usage of electricity. However, relative to the production that we're bringing forth from the State, our consumption of other goods and services, it is declining somewhat, and if the price goes up more dramatically, then that decline will be more rapid. Senator SASSER. Well, looking at your projected increases, some of them look pretty dramatic to me. Dr. Gooisby, thank you very much for giving us the benefit of your views this morning. Dr. Moore, which one of your colleagues is next? PAGENO="0045" 41 Mr. MOORE. Mr. Roger Carismith from Oak Ridge National Laboratory. Senator SASSER. All right, sir. Mr. Carlsmith. STATEMENT OP ROGER S. CARLSMITH, OAK RIDGE NATIONAL LABORATORY, OAK RIDGE, TENN. Mr. CARLSMITH. Thank you. We've already heard this morning of several estimates that have been made concerning future electricity use by TI/A customers. The reliability of these estimates is important. On the one hand, underestimating the requirements can lead to blackouts, economic dislocations, and various kinds of personal hardship. On the other hand, overestimating the growth in demand would cause wasteful expenditures on new generating facilities and as a result needless increases in electric rates. IMPORTANCE OF ACCURATE FORECASTING The forecasts by different analysts give quite a range of results. This should not be surprising to anyone. Forecasting is not an exact science, even if perfect information were available. In fact, there are big gaps in the information needed to analyze electricity consumption accu- rately, as has been discussed by several of the previous speakers. Perhaps even more important, electricity use can be increased or de- creased through the policies adopted by TI/A or other Government bodies. There is a long list of policies that will tend to shape energy use, including environmental restrictions, administrative allocation of scarce fuels, energy taxes and subsidies, and research programs on alternate sources of energy. In my statement I want to illustrate these points by first presenting some results from an econometric model that's been developed at the Oak Ridge National Laboratory, and then to compare these results with some of the others. OAK RIDGE NATIONAL LABORATORY STATE LEVEL ELECTRICITY DEMAND MODEL The model I will discuss is the Oak Ridge National Laboratory State Level Electricity Demand Model. It uses a comprehensive data base extending from 1955 to 1976, and uses econometric techniques to identify the contributions of each of several dozen causative factors. The results for the residential sector show that important variables include electricity prices, natural gas availability, population, income, and climate. In the commercial sector, electricity price, population, and income were important; while in the industrial sector, the value added in manufacturing and electricity price were the important variables. FORECASTS FOR TVA SERVICE AREA We used the model to obtain forecasts for each of the States in the east smith-central region. We then combined these into a single TI/A area forecast. We looked at three scenarios with respect to different assumptions as to future fuel costs. Since the price of electricity de- PAGENO="0046" 42 pends strongly on fuel costs, and the price of electricity in turn is one of the most important factors influencing electricity demand, this pro- cedure gives some idea of the sensitivity of our forecasts to the as- sumptions that we macie. Thus, we ran a base case scenario in which we assumed electricity prices to rise at 6 percent per year from 1976 to 1990, a high-price case in which electricity prices rise 7.9 percent per year over that period, and a low-price case in which prices rise only 4.3 percent. Our results can be summarized as follows. For the base case, elec- `tricity demand rises from the 1976 level of 118 billion kilowatt-hours per year to 213 billion kilowatt-hours per year in 1990, or a growth rate of 4.2 percent per year. The high-price and low-price cases give demand growth rates ranging from 3.5 percent per year to 4.9 percent per year. COMPARISONS WITH OTHER FORECASTS Some idea of the range of uncertainty can be obtained from these three cases. However, it should be kept in mind that the three cases were all obtained with the same model and considered only one source of uncertainty, the electricity prices. In particular, this model does not allow for any reductions in demand caused by new technologies in con- servation or solar energy. A broader perspective may be gained by comparing the entire range of forecasts made recently by several different investigators. In my prepared statement, I've given the numbers for the results that we got with this Oak Ridge model, the results that GAO presented in the re- port that's been discussed several times here this morning, TVA's estimates in 1977, and some recent TVA estimates. I would summarize these by saying that in the horizon year of 1990, in which I made the comparison, the estimates from t.he Oak Ridge model were virtually identical with the estimates presented by GAO * in their report. In turn, these sets of estimates were all lower than TVA presented in 1977. On the other hand, TVA's most recent esti- mates, which cover a wide range of cases, range from a high-what they called their highest estimate, which is in the same range with these others-down to a distinctly lower value of about 2.2 percent growth rate over the period. CONTINUED GROWTH IN TVA'S ELECTRICAL DEMAND Well, what does all this mean? I'd like to summarize by giving a couple of main conclusions that I would draw from these comparisons. The first is that the forecasts reviewed here, including Mr. Goolsby's which was not included in my paper, all predict continued growth in TVA.'s electrical demand. I think that this is a significant point, in that one sometimes hears people saying that it might be possible to have no growth-no further growth in demand; and that sort of view- point does not seem to be supported by any of the detailed analyses that have been made. If we disregard TVA's 1977 estimates as having been superseded by the more recent TVA forecasts, we still have estimates of annual growth rates that range from 2.1 percent per year to a high of 4.8 percent per year. All of them fall within that range. PAGENO="0047" 43 ECONOMIC AND DEMOGRAPhIC FACTORS INFLUENCE ELECTRICITY USE And second, all of these forecasts consider the important role of economic and demographic factors in influencing the levels of electric- ity use~ Ase a result, none of the forecasters is predicting growth rates as high as the 7 percent per year that has been considered sort of stand- ard in the electric utility industry until recently. Thank you. Senator SASSER. Thank you, Dr. Carismith. [Mr. Carlsmith's statement follows:] PREPARED STATEMENT OF H. S. CARLSMITH, CENTRAL MANAGE- MENT DIVISION, OAK RIDGE NATIONAL LABORATORY; AND H. D. NGUYEN, B. C. TEPEL, AND J. L THIMBLE, ALL OF THE ENERGY DI- VISION, OAK RIDGE NATIONAL LABORATORY ELECTRICITY DEMAND FORECASTS FOR THE TENNESSEE VALLEY AUTHORITY SERvICE AREA' Introduction Several recent estimates have been made concerning future electricity use by TVA customers. The reliability of these estimates is an important c~uestion and deserves careful attention. On the one hand, underestimating the requirements can lead to blackouts, economic dislocations, and personal hardship. On the other side, overestimating the growth in demand would cause wasteful expenditures on new generating facilities and needless increases in electric rates. Forecasts by different analysts give a wide range of results. This is not sur- prising. Forecasting is not an exact science, even if perfect information were available. In fact, there are big gaps in the information needed to analyze elec- tricity consumption patterns. For instance, shifts in population and relocation decisions by industry will change the picture. Perhaps even more important, elec- tricity use can be increased or decreased through the policies adopted by TVA and other governmental bodies. There is a long list of policies that will tend to shape energy use including environmental restrictions on various fuels, admin- istrative allocation of scarce fuels, energy taxes and subsidies, research programs on alternate energy sources, and public awareness programs. Those who prepare forecasts as well as those who use them need to keep constantly in mind both the uncertainties and the fact that we control some aspects of our future. In the following sections we will illustrate these points by first presenting some results from an econometric model developed at the Oak Ridge National Laboratory and then comparing these results with others. The ORNL SLED modeZ The ORNL state level electricity demand (SLED) model has been developed for the Nuclear Regulatory Commission by W. S. Chern and co-workers 2 as part of an extensive investigation into the factors that influence electricity demand. It draws on a comprehensive data base extending from 1955 to 1976 and uses econometric techniques to identify the contributions of each of several dozen causative factors. The model uses simultaneous equations to estimate electricity price and electricity demand for the residential, commercial, and industrial sec- tors. The equations were estimated for each of the nine census regions using state-level annual data. The results for the residential sector show that important variables include electricity price, natural gas availability, population, income, and climate. In the commercial sector electricity price, population, and income were important while value added in manufacturing and electricity price were important to indus- trial electricity demand. Forecasts for TVA service area We used the model to obtain forecasts for each of the states in the East South Central region. These were then combined into a single TVA area fore- `Research sponsored by the U.S. Department of Energy under contract W-7405-eng--26 with the Union Carbide Corp. 2 W. S. Chern, H. H. lust, B. D. Holcomb and I-I. D. Nguyen, "Regional E~onometric Model for Forecasting Electricity Demand by Sector and State," Oak Ridge National Laboratory Report ORNL/NUREG-49 (October 1978). PAGENO="0048" 44 cast. by assuming that TVA would continue to supply the same percentage of the total demand for each state as it did in 1978. We looked at three scenarios with different assumptions as to future fuel costs. Since the price of electricity depends strongly on fuel costs and is one of the most important factors influ- encing electricity demand, this procedure gives some idea of the sensitivity of our forecast to the assumptions we made. Thus we ran a base case scenario in whichelectricity prices rise 6.0 percent per year from 1976 to 1990, a high-price case in which electricity prices rise 7.9 percent per year over the same period and low-price case in which prices rise 4.3 percent.3 Table-4 shows the resulting rate of increase in electricity demand for each sector and scenario. TABLE 1.-GROWTH RATES IN NA ELECTRICITY DEMAND FOR 1976-90 [Percent per year] Residential Commercial Industrial Total Base case 4. 0 3. 2 4. 7 5. 1 4.2 59 4. 1 3.6 4.9 4.2 3.5 4.9 High-price case Low-price case These results can be summarized as follows. For the base case electricity demand rises from the 1976 level of 118 billion kWhr per year to 213 billion kWhr in 1990, or a growth rate of 4.2 percent per year. The high-price and low-price cases give demand growth rates ranging from 3.5 percent per year to 4.9 percent per year. Comparisons with other forecasts Some idea of the range of uncertainty can be obtained from the three cases presented above. Howeyer, it should be kept in mind that these three cases were all obtained with the same model and considered only one source of uncertainty- electricity prices. In particular, the ORNL SLED model does not allow for any reductions in demand caused by new technologies in conservation or solar energy. A broader perspective may be gained by comparing the entire range of fore- casts made recently by several investigators. Such a comparison is given in Table 2 and in Figure 1. In Table 2 the three ORNL-SLED forecasts have already been described. The two GAO forecasts have recently been published,4 based on analysis that was done in 1977. The TVA (1977) forecast is also described in Ref. 3 along with the methodology that was used to produce it. The TVA (1978) forecasts are from recent unpublished estimates by the TVA Office of Power and represent the extreme high and low estimates from a larger number of projections made by TVA. TABLE 2.-FORECASTS OF TVA POWER SYSTEM REQUIREMENTS [Billions of kilowatt hours] TVA (1978) TVA (1978) Year TVA (1977) low high GAO' low GAO' high ORNL- SLED' high-price ORNL- SLED' base ORNL- SLED' low-price 1976 118 118 118 118 118 118 118 118 1980 136 141 145 1985 192 176 188 162 174 185 1990 245 159 220 2192 2229 193 213 235 2000 341 223 311 `Calculated values multiplied by 1.072 in 1977 and 1.079 in 1990 to convert to net system requirements. 2 Interpolated values. "Growth rates are with respect to current dollars. To convert to real dollars subtract 3.6 percent per year assumed average inflation rate. ~ United States General Accounting Office, "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority," EMD-78-al (Nov. 29, 1978). PAGENO="0049" 45 COnClUSIOnS 1. The forecasts reviewed here all predict continued growth in TVA's electrical demand. However, there is clearly a large measure of uncertainty in the mag- nitude of that growth. If we disregard the TVA (1977) estimates as having been superseded by TVA's more recent forecasts, we still have estimates of annual growth rates ranging from 2.1 percent per year (TVA 1978 low case) to 4.8 percent per year (ORNI~-SLED low-price case). 2. All of these forecasts consider the important role of economic and demo- graphic factors in influencing the levels of electricity use. As a result, none of the forecasters is predicting continuation of the 7 percent per year growth that has until recently been considered axiomatic in the electric utility industry. BILLiONS OF kWhr 19g. 1 FORECASTS OF TVA POWER SYSTEM REQUIREMENTS 100 1916 EFFECT OF PRICE ON ELECTRICITY CONSUMPTION Senator SASSER. Mr. Carlsmith, you mentioned that one of the most important factors influencing electrical demand is the price of elec- tricity, I think? Dr. CARLSMITH. Yes, sir. Senator SASSER. I touched on this briefly with Dr. Gooisby just a moment ago, but pointing out that in the past 13 or 14 years the resi- dential price of electricity has increased by more than 200 percent, in current or real dollars that's in excess of 100 percent. Now, the models for forecasting future demand seem to' assume that, and we're hearing it here today, that such increases in price would lead to decreases in residential consumption. 1-lowever, I'm told that in 1965 the average TVA residential customer used 10,381 kilo- 250 200 150 ORNL-SLED GAO - - TVA / HIGH-PRICE Low Low 1980 1985 1990 45-720-Th-----4 PAGENO="0050" 46 watts of electricity, but last year in the face of electrical rates which have at least doubled, or I think really more than that, last year `the average electrical residential consumer in the Tennessee Valley area used 16,250 kilowatts Now, this is an mcrease of more than 60 percent in a time when electrical rates have escalated substantially Now, my question is, what evidence, directing it to you, what evi- dence do you see that consumption will decrease as electrical rates go up~ ECoNOMIC GROWTH'S EFFECT ON CONSIThfPTION Dr. `CARLSMITH. Yes, sir. All of the things that you stated are abso- lutely correct. It is true that electricity prices are an important factor, one of the most important factors in determining demand, but you have to keep in mind that there are also some other important factors, which include population, incomes, the amount of industry that is located in the area. All of these have been increasing during the period that you were referring to, and all of them are projected to continue to increase during the next couple of decades. So, the net result in terms of electricity demand will come from the effect which the price in- creases will have: to make demand go down, and these. other factors that all tend to make it go up. The models that we've been discussing, and the calculations that we've been discussing this morning, all take the sum total of these effects into account, and as I indicated, all tend to come out with the same sort of result: that electricity demand will continue to increase but not at as fast a rate as it has in the past. Sen'itor SASSER Well, thank you very much, Mr Carlsmith I mig~ht say that we're very pleased today to have Dr. John Gibbons. I'm de- lighted that he could join us and I know that Dr. Gibbons is very knowiedgable in the area we're discussing today and that is projecting energy demand of the future, and John, I wonder if you would care to comment or give us your views at this time. STATEMENT 0]? ~1OHN *H. GIBBONS, UNIVERSITY 0]? TENI~1ESSEE Dr. GIBBONS. Thank you, Senator. I have not prepared testimony in the interests of time, or in the conviction that my predecessors today would give you a complete accounting of the analyses that lay behind the sums of the GAO work, as well as the independent work at Oak Ridge and at the university. However, I would like to, perhaps, add a few comments to those statements made this morning. COMPARATIVE COSTS OF POWERPLANTS First of all it seems to me important for us to remember that the price of a new powerpl'ant in the old days used to be less than the price of an existing powerplant. The economists would say `that the margina.! cost of additional electricity was lower than the average cost that was already on the system. Now, that situation turned around in `the early 1970's and it means `that we must be even more careful than in earlier times about our plans for expansion, simply because of the increased cost of an error that might lead us to over capacity. Nowadays I think we could defend the PAGENO="0051" 47 case that over capacity or an excess of power is undesirable because of the increased cost of keeping those plants on line. Senator SASSER. You might push that microphone away from you just a little bit, John. Dr. GIBBONS. It's just as costly as an undercapacity or a shortage of electricity. Senator SASSEI~. All right. NATU1~AL GAS IN COMPETITION WITH ELECTRICITY Dr. GIBBONS. The second point is that we're faced with moving targets. Targets that are moving faster and with greater uncertainty than, perhaps, ever before. For example, there are moving estimates of energy supplies and certainly of energy prices; in the gas area alone there's a great deal Of uncertainty about how much more gas may come forward at higher prices, but an increasing optimism that a great deal more gas may come forward at higher prices. I would remind you that even if gas rose to $5 per million Btu, a considerable rise, it would still be considerably less expensive than electricity at 3 cents per kilowatt hour; which is about where we are now in TVA country. As, for instance, gas becomes more available at the higher price it may well result in competition for electricity, even here in the Ten- nessee Valley. There are alsO uncertainties as to the extent to which energy is substitutahle~ How far, for instance, can one substitute more insulation or a better designed refrigerator for electricity and come out ahead in terms of consumer cost ~ Also, there are uncertainties as to Federal actions such as tax credits. The potential economic viability of solar heated water, even in the TVA area, is now strongly effected by some of the new tax credits that are a result of the National Energy Act. Uncertainties also exist with regard to the future course of inflation and that comes to roost on the issue, for instance, of the bonded in- debtedness ceiling for TVA. PROJECTION METHODOLOGY FAVORED OVER FORECASTING The third comment I would like to make is to again call to your at- tention the difference between forecasting, which is the statement of what is most likely, compared to projectiors which is a statement of "if you assume this, then that will probably happen." It is in this latter mode of making projections, it seems to me, that we're much more suited in this new era of uncertainty. In that regard, I'm very pleased that TI/A's recent moves toward using projection method- ology rather than a single forecast. SMALLER FAMILY SIZE IMPACT ON ENERGY DEMAND The fourth point comes from reflection on the service I've had over the last several years on a conirnittee of the National Academy of Sciences, which examined on a national basis the demand and supply projections for the Nation all the way out to the year 2010. In the PAGENO="0052" 48 course of that work, it becomes much more clearly understood that the trends toward smaller family size, the consequent slowdown of increase in our labor force, and changes in social patterns will in the long run, affect our energy demand in a very significant way. ENERGY CONSERVATION SENSITIVE TO COST Additionally, and most importantly, perhaps, was a convergence of the ideas, and in fact of the results of the analyses carried out on the one hand by economists, and on the other hand by engineers. The out- come of this convergence of opinion is that conservation, in place of which I prefer the expression "increased productivity of energy," is highly sensitive to energy price. That is, as energy price moves up- ward, it is very cost effective to do something about it rather than continuing to buy the same amount of energy. In fact, in many in- stances the total cost of an amenity, whether it be a refrigerator of a certain size, an automobile of a certain quality, or a heated house, can actually be decreased in actions that cause it to use less energy. In this sense, in this kind of move toward higher productivity of energy, we find these actions to be anti-inflationary; because the amenity is ac- quired for a lower total cost. GAO's projections for TVA, and also TVA's own projections are very compatible with the results that were arrived on a national basis through this academy study. There are much more detailed national studies that are fully compatible with these particular regional studies, and those all have the same bottom line. That the future demand growth for energy based on sensible economic reasons and actions will be much slower than the demand growth that obtained during the 1950 to 1970 time frame, but the changes will come slowly, because they mostly represent changes in the characteristics of our capital stock, rather than changes in the use of the existing stock. TVA BORROWING AUTHORITY With respect to TVA's request for increased debt limit, I would make two short observations. One is that a conservative appraisal of future inflation unfortunately now means that a higher debt limit will be required, even if real costs don't change. Secondly, that ac- tions to keep demand growth for new central powerplants, and the accompanying higher energy price that would come if we had to build those plants, in check will also cost money. It won't come free; how- ever, it will mean less money than otherwise would be required to ex- pand and build those additional plants. That is, we're moving our in- vestments from building more central powerplants, or at least a por- tion of those investments, to taking actions that enable us to provide the arnentities without those plants. In the process we can save our- selves money. Finally, I wish to applaud TVA's rapid movement over the last couple of years, toward regaining its national leadership as a yard- stick for the Nation. We should hope that TVA will also mount projects of national sig- nificance as well as regional significance; where it makes good economic sense to the consumers in the region, these projects should be based, I believe, on internally generated resources and through borrowing. In PAGENO="0053" 49 doing this we can help hold down our own electricity prices. In other instances of national self-interest, Federal funds should be provided, and I believe, that the Authority in concert with other resources and expertise in the region has now the capability to play an effective corn-' prehensive and even central role in the national energy effort. Thank you. Senator SASSER. Well, thank you very much, Dr. Gibbons, for that very interesting and perceptive statement. Dr. Mooiii~. We have one more panelist, Senator Sasser, who may have some observations to make, William Chandler of the University of Tennessee Environment Center. STATEMENT OP WILLIAM CHANDLER, UNIVERSITY OP TENNESSEE ENVIRONMENT CENTER SPEEDUP CONSTRUCTION TO PREVENT COST OVERRUNS Mr. CHANDLER. Senator, I would like to just reiterate one point made by Robert Bohm, regarding the possibility of reducing the amount of time required for constructing these powerplants. Reduction of this time could possibly help reduce cost overruns, which was one issue he raised earlier. Reduction of this time may be possible because the con- struction of the industrial cogeneration powerplants requires only 3 to 5 years, compared with 9 to 12 years for large central station gen- eratrng plants. As the General Accounting Office pointed out more than 5,000 MW of potential capacity exists in the TVA region today, so that exploita- tion of this potential could reduce power costs of the overall energy de- mand as well as add to the flexibility of TVA's operation. Senator SASSER. Thank you. Dr. Moore, I wish to express my appreciation to you and your col- leagues from the University of Tennessee and from Oak Ridge Na- tional Laboratories for the light that you have shed on this subject for me~ and I think for others today. We're in your debt for appearing here, and I wish to express my gratitude, and I will convey many of the observations that you have made here today to my colleagues on the Senate Budget Committee as we consider this matter that we're having a hearing about today, and also to my colleagues on the Appropriations Committee. Thank you very much. We have had a number of requests from pub- lic witnesses to present testimony at this hearing, and we've undertaken to hear from all of them, or will undertake to hear from all of them later; but yesterday I learned for the first time that the Tennessee En- ergy Authority desired to testify. Public witnesses have been scheduled to testify beginning at 9:45 during the afternoon session. However, a Mr. Ed Spitzer of the Tennessee Energy Authority is here. He has pressing business which is going to require that he return to Nashville prior to 2:45,so in an effort to accommodate Tennessee Energy Author- ity. I wish to allow him to testify at this time. Mr. Spitzer if you would come forward, and we're asking, I might say, Mr. Spitzer, all public witnesses if at all possible to confine their remarks to 10 minutes. PAGENO="0054" 50 STATEMENT OP ED SPITZER, TENNESSEE ENERGY AUTIIORIT! Mr SPITZER Thank you, sir Senator, I appreciate the opportunity to be here and the courtesy that you have extended me $30 BILLION CEILING PROVIDES WA MORE FLEXIBILITY I would like to take a very positive position right at the very begin- ning to state that if the $30 billion is to be used to develop generating capacity for the valley, that we heartily endorse it. This is flexibility that the board needs, and I have been assured by both David Freeman and Dick Freeman just before this meeting that that certainly is their intent, that this would only be used for generating capacity in the valley. Now, there is a single unifying reason modern society generates electrical energy, and that's' to create and maintain employment. Without electricity the wheels of commerce and industry could not turn, nor could governments or systems of individuals and collective services be operated. Society raises money, either by saving or borrowing, and invests in adding generating capacity so that economy can move ahead. In Tennessee this process has been efficiently and methodically handled by a very special Federal corporation, Tennessee Valley Authority. INDUSTRIAL GROWTH DEPENDENT ON AVAILABILITY OP ENERGY SUPPLIES When we get to discussing power projections these can be self ful filling prophesies that what is available will be used. If there's not enough, we won't use it, if there's too much, we tend to find ways to use it. I think that industrial growth is dependent on that availability. I think that as you look at some of the things that have been said here this morning, such as costs being a factor; we have seen in other areas of energy, such as natural gas, the intrastate gas of the Gulf States was much, much higher priced than natural gas in other States; and yet industry flocked to those States to utilize the reliability of that natural gas, as opposed to the price of it SOLUTION OF ENERGY PROBLEM POLITICAL DECISION Now, when we start talking about projections and forecasts, and be it done by an economist, or an engineer, I think that much more of our forecasts are done politically, than they ever are by technology and things of that sort. The solutions to the energy problems will be political decisions and not technological problems. They cannot move that rapidly; but when we look at other forms of energy, when we look at natural gas, when we look at coal, when we look at oil, and we see that we do not know where these supplies-how they're going to vary. We can get all sorts of projections. We hear projections that we get Th percent of our energy from oil and natural gas, and those are being rapidly depleted. How much of that will have to switch to coal and nuclear and become electrical energy, and how much of this do we have to have available? These are projections that are very difficult to make. PAGENO="0055" 51 TVA'S DISTRIBUTION OF ELECTRICAL ENERGY But, one of the big concerns that we have in Tennessee is other Fed- eral agencies, such as the Department of Energy, and the Federal Energy Regulatory Commission, and their power over the Tennessee Valley Authority, their ability to order them to wheel power to other parts of the country, their ability to order them to expand the service area. Now, there are sections of the country that, they don't want the power stations in their section of the country. They don't want the social economic impact of construction. They don't want to finance it. They don't want the pollution that comes from it, and they cer- tainly don't want the radioactive wastes; but they do want that elec- trical energy, and I think that they would like to import it from the people of the valley. I think they must figure that we're sturdier peo- ple down here and can withstand these things better. It's almost as though they want to bring it in from the colony, and I have seen this happen. The Gulf States are almost colonies of the Northeast when it comes to natural gas and oil. I don't want us to have the same thing happen in electrical energy. TVA ROLE IN EMERGENCY ENERGY SITUATIONS Now, I must say, emergencies we understand, and we are prepared to-you know, we are the Volunteer State, and we support our sister States and our Nation, but we need to look at what are emer- gencies. Are they peak period today, are they a weeklong cold snap, or could an emergency be a 10-year period in which we just didn't build generating capacity somewhere else, and we have to export it to them. These are the type of things that are very serious to us, and as Jack Gibbons so well put that it cost a lot more money to deliver a kilowatt of electricity from a new plant, than it does one that's 10, 15 years old. Now, if we're going to be asked to build new plants to ship that electricity out of here, but roll in the pricing first, that means we're not only sending electricity out, we're going to be sending our money out, `and these are concerns that will be controlled politically. Not by pro- jections or forecasts, and they are very serious to the valley. Now, the people of the valley have no input into this. We have a board of directors that will control this for us, the TVA board, but the voters do not put `them there. Our Public Service Commission h~s no control over them, these are people that we elect. Our Governors have no input, as to exactly what's going to happen. Senator SASSER. I'd say that `Senators have little input too, some- times, Mr. Spitzer. Mr. SPITZER. As advisory role, yes. Senator SASSER. OK, I said little input. MORE LOCAL AUTONOMY IN OPERATION OF TVA NEEDED Mr. SPITZER. But, we appreciate, you know, these power estimates that TVA is making up, and we appreciate what GAO is making, but you know, if you're wrong the people of the valley are going to pay the bill, and they can't throw the rascals out. Now, you can replace Public Service Commissioners, you can replace legislators, you can replace Governors, but you cannot replace TVA PAGENO="0056" 52 people, `and you cannot replace GAO's estimates. That's just the way it happened. All the people of the valley are doing is paying the bills. They do not have any input into this. They will not have `any input as to whether the power is wheeled out of the valley, they will not have any direct say so as to whether that service area is going to be expanded, and these are serious concerns on the future debt limit of the valley When you think of how little input we have into it, and I say this facetiously, but people in Boston have been known in the past to have had tea parties for lesser offenses, but when we see that these Presidential `appointments are made, and there are three people there `who have this control, the Senate confirms them to 9-year terms of office. Those three people have absolute power. They are a troika, and we `have in the valley, we'll shortly have `a veritable energy oasis, and that oasis will be in their control They have the ability to make this area a highly industrial area with a high per capita income, or they have the ability to make us an agricultural State, or they have the ability to select ~n area in between where they think the quality of life is best `for us, and develop it to that point. EXEMPT TVA AREA PROM NATIONAL RATE SETTING That's power that our Governors in this area do not have, that our legislative bodies do not have. But, I repeat, if this is to be used in the valley we certainly endorse it, but if it is to be used outside of the valley, then there are some requirements that I think we should insist ~ I think that if it is going to be exported, that there should defi- nitely be incremental pricing, that is essential to us I think that if we are going to be supplying electrical energy to other parts of the Nation, then I think that we should be exempt from national rate setting Now, we don't have nation'tl ratesettmg in electricity, but if you look at other forms of energy, you do in natural gas. We~ do in `oil, and I assure you that there are people looking at the idea that they would sure like to average out with the Tennessee Valley area, and that's serious to us. INCREMENTAL PRICING I think that we should have some way that the people of the valley are iepresented on that board of TVA, and I also think that if that power is to be shipped out and there i~ incremental pricing, I think that there should be some method of directing funding to the States `of the valley in proportion to the power sold in the TVA area so that we `could develop `other forms o'f energy so that we can develop some `of these soft forms of energy, such as solar or recycling of waste, or `electric cars or biorn'ass, the use of reject heat or the conversion of coal *to methanol or gasoline. We don't `want to become indentured servants, and that, sir, con- `eludes my remarks, and I thank you very much. * ` TVA'S BORROWING AUTHORITY Senator SASSER Well, thank you, Mr Spitzer I gather that the thrust of your statement is that you would be in favor of lifting the de1~t ceiling? PAGENO="0057" 53 Mr. SPITZER. Yes, sir. Senator SASSER. But you would be in favor of putting the caveat on it that the additional power to be generated would be consumed here in the Tennessee Valley area except in time of perhaps emergencies in other areas? Mr. SPITZER. That is right, and we're concerned that those issues are thority Board of Directors, and I thought I saw his fellow director, Mr. Richard Freeman, the.re. Senator SASSER. Thank you, Mr. Spitzer. We'll recess until 2. [Thereupon, the hearing was recessed.] * * * * * * * AFTERNOON SESSION Senator SASSER. The hearing will come to order, and I'd like to welcome now Chairman David Freeman, of the Tennessee Valley Au- thority Board of Directors and I thought I saw his fellow director, Mr. Richard Freeman, there. Mr. RICHARD FREEMAN. I'm going to stay in the back row. Senator SA55ER. Chairman Freeman, if you'd be kind enough to introduce your colleagues and make any statement you would wish to make, and then we'll get into their statements. STATEMENT OF S. DAVID FREEMAN, CHAIRMAN, BOARD OF DIREC- TORS OF THE TENNESSEE VALLEY AUTHORITY, ACCOMPANIED BY HUGH G. PARRIS, MANAGER OF POWER; ROBERT S. HEMP- HILL, JR., DIRECTOR, DIVISION OF ENERGY CONSERVATION; LYNN C. MAXWELL, ASSISTANT CHIEF, ANALYSIS BRANCH, DI- VISION OP POWER UTILIZATION; LEON RING, GENERAL MAN- AGER; JIMMY CROSS, CHIEF, STRATEGIC PLANNING BRANCH; AND BILL WILLIS, ASSISTANT TO THE MANAGER OF ENGINEER- ING, DESIGN, AND CONSTRUCTION, ALL PROM TVA Mr. FREEMAN. Thank you, Mr. Chairman. I am accompanied today by, on my right Hugh G. Parris, our Manager of Power and our prin- cipal witness; Robert S. Hemphill, Jr., on my left, the Director of our new Division of Energy Conservation; Lynn C. Maxwell, Assistant Chief of the Analysis Branch, Division of Power Utilization; next to Mr. Hemphill is Leon Ring, our General Manager; then Jimmy Cross, Chief of our Power Strategic Planning Branch; and Bill Willis, As- sistant to the Manager of Engineering, Design, and Construction. All of us are here to present to you this afternoon a crucial item for TVA and for the Tennessee Valley. ECONOMIC GROWTH IN TVA REGION In examining the question before us Mr. Chairman, it is essential that we consider the unique relationship of TVA to the Tennessee Valley region. TVA has a special responsibility which sets us apart PAGENO="0058" 54. from most Federal agencies TVA has been and will continue to be a principal factor in tbe economic and social well-being of this region. Our role as a supplier of electric power is central to TVA's regional development responsibility. Congress placed upon TVA the special responsibility to supply the electric energy needs of the region at the lowest feasible rates. And as you will recall from confirmation hearing, Senator Sasser, that was a point which you impressed upon me quite vividly. We take this responsibility quite seriously. We are projecting rapid economic growth in this Valley. We are projecting electric rates that are no longer a part of a double digit inflation, and we aie also projecting a very aggressive conservation effort S INCREASE IN DEBT CEILING A NECESSITY The proposed $15 billion increase in TVA's debt ceiling is vital to TVA's discharge of the responsibilities it has as a regional economic developmental agency and as a supplier of electric power. The number represents our best judgment with respect to the amount of borrowing authority necessary to meet these responsibilities over the next 5 years. Now we all know $15 billion is a whale of a lot of money. Perhaps it might be helpful to take a look at the $15 billion figure with the effects of inflation removed If viewed in terms of 1975 dollars, when we had an increase of $10 billion, it is roughly equivalent to $10 2 billion. In terms of 1970 dollars it is the equivalent of $7 billion. The point that I'm trying to make is that while the sum is great, the buying power is not much different from the two previous requests the TVA board made at 5-year intervals for increases in our ceiling. The witnesses to follow will present the detailed estimates to sup- port our requests. But before we go into these details, I'd like to make three basic points: TVA SELF SUPPORTING AGENCY First, TVA is not asking the Federal Government for money This request will permit us to move forward with plans for the future, to borrow money that will be repaid on the credit of our ratepayers. The Federal Government incurs no obligation for TVA borrowing. The timing of this planning and the capability to act in a timely manner are just vital for an electric power system. The decisions on our desks today are decisions that affect this valley in 1990 and 1992. We now live with a ieadtime of 10 .to 12 years in providing for the region's electric power supply. S Second, TVA is planning for a prosperous future, ~ot a "no growth future" A prosperous future assumes a growing demand for electric enregy used with conservation, not wastefully, but necessary if the economy is to grow. In a sense the ceiling on our debt limit is a ceiling * on the Valley's growth. INFLATION IMPACT ON CONSTRUCTION PROJTECTS Third, we recogmze that TVA powerplants presently under con- struction are costing more than they were originally estimated, how- ever, the experience of TVA is better than, and certain parallels that PAGENO="0059" 55 ~of e~rery large construction project in the Nation. We are aggressively striving for improvement. The central fact is that inflation has eroded the purchasing power of the dollar to the point that we need additional borrowing authority to complete the powerplants under construction. We cannot order any new capacity without such authority, and we need to be in a position to place such orders at any time. Senator, I have engaged, personally, in the art of projecting energy demands for the future and I think that everyone in this room knows that it is an uncertain art and that there is room for differing judgment. Demands for electric power are going to reflect the growth of our economy and no one can be absolutely sure what that growth will be. And they will also reflect the success of our conservation efforts. Under our utility responsibility we must plan for a reasonable measure of optimum growth. If our estimates for the future do not materialize, the worst that can happen is that we will not have to borrow the money as soon as we otherwise would and we won't have to come back to the Congress for 6 or 7 years rather than 5 years. But if we don't get this essential legislation, economic growth in the Valley will be halted. We believe the issue is clear and the need is urgent. We respectfully seek your all-out support. The next witness will be Mr. 1-lemphill, who will briefly sum- marize his testimony and then Mr. Parris will take over. Senator SASSER. Mr. Hemphill. STATEMENT OP ROBERT S. HEMPHILL, JR., DIRECTOR, DIVISION OP ENERGY CONSERVATION, TENNESSEE VALLEY AUTHORITY Mr. HEMPHILL. Thank you very much, Senator Sasser. I'd like to submit the written testimony for the record and only add a couple more quick points to summarize that. CONSERVATION AND SOLAR PROGRAMS First of all it seems reasonably clear to those people who have analyzed it carefully that conservation and solar programs are, in fact, quite attractive. The reasons are fairly simple. They are generally cost effective. Data we have from homes we have built to our super savor standards indicate that homeowners living in those homes save approximately 36 percent on their electric bills compared to people living in homes built to current standards of construction. Perhaps equally important those investments pro- vide homeowners and residential consumers with essentially infla- tion-proof investments. There are basically no fuel costs involved once you've made a conservation or solar investment. So once you've paid off the capital costs you're not paying for fuel. Our solar water heaters in Memphis cost $12 a month in terms of capital costs and we figure that will provide about 75 percent of the hot water needs to those families. rThat~s $12 a month right now and it's $12 a month for the 25 years of the program. It won't increase any. PAGENO="0060" 56 Unfortunately we're not able to make the same statement about fuel costs. I would be tempted to say, were it not in such bad form, that these investments are, therefore, too cheap to meter but I'll hesitate in doing that. COST EFFECTIVE TO POWER SYSTEM These investments are also very cost effective to the power system. Our calculations indicate that we are providing equivalent capacity something on the order of-the numbers are a little rough-some- where between $150 and $400 a kW compared to other potential investments which are somewhat higher than that. Conservation investments are also generally ecologically benign although we are looking `at some cases where there may be some minor problems such as wood heaters. Finally, they tend to be siightly more labor intensive than other forms of investment and that can't help but generate more jobs in the valley. TVA LEADER IN CONSERVATION PROGRAMS The second point I think it important to make is that because of the `attractiveness of the programs, we `have, in fact, incorpo- rated them as an integral part of our power system. We have now the most comprehensive and aggressive conservation and renew- able resource program in the Nation. Let me give you three indices of that If you look at our load forecasts for 1990, you'll find that 7 to 10 percent of the electrical energy that we project to be ~con- sumed in the valley in that year will be provided by conservation and solar investments. Moreover, we find that 11 `to 16 percent of the capacity that we'll need to meet our winter peak, or somewhere `between 4,000 and 6,000 megawatts, will be provided by those same conservation and renewable programs. IMPLEMENTING GAO RECOMMENDATIONS The second mdex of our seriousness in this area concerns the GAO recommendations in the analysis area. Of the 11 recomrnen- dations which they made, we have either accomplished or are in the process of implementing 10 of those 11. The eleventh, the one which we have not implemented, in the one which relates to sur- charges, on which I believe there was a dialog earlier. In two cases, in fact, we're going further than the GAO recommendations call for.' They simply said, implement the national energy plan; our home insuiation program goes further than that. We have added three additional programs not recommended by the GAO in their report; the program for wood heaters, an aggres- sive commercial and industrial conservation program and a pro- gram where we are considering mandatory building standards. The third measure by which I think we should be judged is our recognition that these programs have substantial costs; we project somewhere between $700 million and probably closer to $1.3 billion cumulatively by 1990. That's a significant amount of money and I think that it ought to be reasonably clear that we are `serious about these programs if we propose to invest those sorts of sums in them. PAGENO="0061" 57 In conclusion, let me say that this is truly an ambitious pro- gram. I know of no electric utility in the country that can come anywhere close to matching it and I think it's something we can all be proud of. PREPARED STATEMENT OF ROBERT S. HEMPHILL, JR., DIRECTOR OF ENERGY CONSERVATION, TENNESSEE VALLEY AUTHORITY CONSERVATION AND RENEWABLE REsoURCES PROGRAMS As indicated in the report to the Congress prepared by the General Account- ing Office conservation and renewable resources are key components in solving the Nation's energy problems. TVA has recognized the role `conservation should play and has placed increased emphasis on expanding its conservation efforts to the extent that we now have the most aggressive and comprehensive program in the Nation. Our conservation efforts will play an important role in reducing energy con- sumption in the Valley area, thus reducing power supply costs and offsetting the need for costly generating facilities. However, these benefits are not received without associated costs. Present estimates indicate that up to $1 billion of capital could potentially be used to support an ambitious long-term conservation program. TVA's conservation programs are expected to result in electricity savings in 1990 of 15 to 20 billion kWh. Admittedly, these projections are ambitious. Many factors such as consumer acceptance and participation, and unforeseen techni- cal, institutional, and environmental problems could well affect the attainment of program goals. We are presently studying various rate reform and load management pro- grams. These programs have not been incorporated in our load forecasts and will most likely be required to attain the projected energy and capacity savings already attributed to our conservation efforts. They should also produce addi- tional capacity and energy savings which we have not quantified. TVA has several major programs which are well underway as well as others still in the planning phases. To provide better insight into the nature of our programs, brief summaries of various programs are provided. HOME INSULATION PROGRAM The `TVA Home Insulation Program is designed to promote energy conser- vation and the more efficient utilization of electricity by encouraging all resi- dential consumers to have adequate insulation and other weatherization meas- ures. The program provides onsite energy surveys and recommendations for all interested residential consumers and subsidized financing to cover the cost of insulation and other weatherization measures in dwelling units that are either heated or cooled electrically. Consumers who request a survey, whether they have electric heat or electric air-conditioning, are provided with complete recommendations on how they can have a more energy-efficient dwelling unit. The energy advisor will consult with the consumer to help find sources of funds that can `be utilized for weatheriza- tion measures if the consumer is not eligible for a subsidized loan. There are many conservation measures recommended `by the energy advisor that can be performed `by the consumer himself, thereby providing him direct benefits from the survey and recommendations prepared by the energy advisor. Through 1978, 87,726 survey's have `been completed and 30,348 consumers have used the program to install weatherization materials. The reduction in electric use `by participants in this program will permit savings in capacity and fuel costs, thereby benefiting all consumers of TVA power through lower rates than would otherwise `be required. TVA will `seek to ac'hieve an estimated reduction in peak demand of 1,099 megawatts after an 8-year period, which would result in lower capacity requirements and lower generation and purchased power cost for peaking. It is estimated that this program, which is more comprehensive than that required by the National Energy Act, can result in an annual energy reduction of 2.7 billion kWh after an 8-year perio'd. PAGENO="0062" 58 HEAT PUMP FINANCING PLAN This program is designed to expand the Home Insulation Program by making available a loan for consumers who install a heat pump in an existing dwelling and meet certain installation requirements. Loans for heat pump installations would be repaid over a 10-year period and would include interest at 8.5 percent per annum. Based on an average loan of $2,000 for a heat pump retrofit installa- tion, a total of $47.25 million will be outstanding in 1985. Total estimated operat- ing cost over the program's 8-year life is $5.9 million. Program goals call for 5,000 retrofit heat pump installations per year. Based on 4,270 kWh savings per year and 0.7 kW savings per heat pump installation, 1985 system savings are approximately 150 million kWh and 21 megawatts of capacity. Over the program's 8-year life, total savings equate to approximately $12 million. SUPER SAVER HOME PROGRAM A house built to Super Saver standards will yield an annual reduction in heating and cooling energy of approximately 50 percent compared to conventional construction. $uper $aver homes are currently being built in the Tennessee Valley area, but of the 60,000 new homes built in the past two years, only 1,000 were built to $uper $aver specifications. It is apparent that the current low-key voluntary program should be expanded and emphasized to encourage many new homes to meet Super Saver type stand- ards. Beginning February 27, 1979, TVA will hold public hearings on service practices. One practice to be considered is that new buildings, including homes, must meet energy conservation weatherization standards developed by TVA as a requirement for electric service. Program goals call for approximately 140,000 Super Saver homes to be built in 1985. Based on 8,750 kWh savings per year and 1.64 kW savings per Super Saver home, 1985 system savings are approximately 1,203 million kWh. COMMERCIAL AND INDUSTRIAL (C&I) CONSERVATION PROGRAM Sixty-eight percent of all energy generated by TVA is consumed in the com- mercial and industrial sector. In 1977 this represented 80 billion kWh which were consumed by approximately 50 directly served TVA customers and 285,000 distributor-served customers. TVA is implementing an in-depth audit program for commercial and industrial customers for all forms of energy and will include estimated economic payback periods for each recommended energy conservation opportunity (ECO). The audits will be free to all nonprofit C&I customers. Profit making customers will be charged for the audits and rebated $1 of the audit charge for every $2 invested in electrical ECO's. Our goal is 5,000 C&I audits per year when the program is fully operational. Private consultants will be utilized in addition to TVA's field engineers. We will also be working closely with architects and consulting engineers to improve the energy efficiency of new structures. To help ensure the implementation of the ECO's identified in the audits, TVA will make available loans to the C&I customers. These loans will be available for a maximum of 10 years with a maximum of $100,000 per site and will bear an interest rate equal to TVA's current debt interest rate plus 1 percent. It is estimated that the maximum outstanding loan balance will be approximately $280 million which will occur in 1985. Energy conservation forecasts for the year 1990 indicate savings of 6.3 billion kWh in energy usage and 1,120 MW in demand. We estimate the audit potential of `the existing customers to be a maximum of 150,000. Of these audits, approxi- mately 35,000-40000 will be for nonprofit organizations, including educational facilities, hospitals, governmental buildings, churches, and clubs. Approximately 225 specific type conservation workshops will be presented during the first few years of the program. SOLAR WATER HEATtNG PROGRAM TVA has begun a demonstration program In Memphis to finance solar water heating systems with no downpayment and a 3.4 percent 20-year loan. Several of the 1,000 systems have already been installed. Each system is expected to pro- PAGENO="0063" 59 vide 75 percent of the hot water for a typical 4-member family. The South Mem- phis Community Development Corporation, a nonprofit community development corporation, trained the workers who are installing the systems. Each system will save approximately $600 (present worth) in reduced energy and electric generating costs over the 20-year term of the loan. This savings is used to finance the loan program. A sample of the water heaters will be instrumented to evaluate their performance. If this program proves successful, we will consider expand- ing it throughout the Valley. WOOD HEATING PROGRAM TVA ha's begun a demonstration program to finance the installation of modern, efficient wood heaters with no downpayment, interest-subsidized 3- to 5-year loans. The first of 1,000 heaters is now being installed in North Georgia. Each home- owner who installs a heater is expected to save about $66 per year in electricity costs. A sample ~;f the heater installations will be instrumented to determine efficiency and environmental impact. The heaters are expected to save TVA an estimated 6,112,000 kWh of electricity annually and 6 megawatts of peaking ca- pacity. If the program proves successful, we will consider expanding it through- out the Valley. There may be some areas where the ambient air quality standards of the Clean Air Act will preclude such a program, however. COGENERATION TVA has recently completed a preliminary assessment of the potential for cogeneration in the TVA service area over the next 20 years. Work is in progress to achieve completion of a final draft and this assessment should be published, during the first half of 1979. A Cogeneration Task Force is working on program plans for the development of' the cogeneration potential. Current options under consideration may include TVA technical and financial assistance and maintaining favorable standby power rates and other assistance where needed. Program efforts under this option are estimated to transfer loads that would otherwise be served from the TVA grid of about 285 MW and annual energy production of about 2.2 billion kWh to indus- try-owned inplant generation facilities by 1990. If it is possible to develop more attractive methods of TVA financial assistance and with favorable economic conditions in industry, it may be possible to achieve a higher level of cogeneration development in the industrial plants and energy park complexes. With this more intense effort it may be possible to achieve the installation of about 625 MW in industrial plants and energy park complexes by 1990. These facilities could have an estimated annual energy pro- duction of about 4.6 million kWh for loads that would otherwise be served by TVA-owned facilities. SUMMARY The preceding summaries represent some of the programs which we have taken into account in developing our recent load forecasts. Our alternative load forecast's also include anticipated savings from other programs under develop- ment. Examples of such programs include: extended efforts in the home insulation and heat pump programs, Valley-wide solar space heating and water heating pro- grams, residential biomass program, and commercial and industrial biomass pro- gram. Potential savings are provided on the attached table. As indicated earlier, TVA hopes to achieve an electricity savings in 1990 of 15 to 20 billion kWh through successful implementation of these programs. Ex- pressed in terms of capacity savings rather than energy savings, accomplish- ment of program goals would be equivalent to offsetting the addition of three or four large generating units. The achievement of these projected energy and capacity savings requires a significant amount of capital. Of the $15 billion in borrowing authority we may want to use up to $1 billion in cost effective facilities that will be candidates for future investment to achieve an energy saving of up to 20 billion kWh. It is im- portant that TVA be provided this additional borrowing authority in order t~ carry out its conservation objectives. PAGENO="0064" RESIDENTIAL Home insulation program Approximately 43,200 loans per year Super saver home program 36,000 homes per year builtto energy efficient super saver standards. Residential heating equipment: Heat pumps: Low Low-interestloans (834 percent) pro- vided; 5,000 per year from heat pump financing plan; approxi- mately 15,000 per year through super saver efforts. High Low-interest loans provided; inten- sified effort; 19,000 per year from heat pump financing plan; approx- imately 36,000 per year through super saver efforts. Biomass: Low Expanded wood heater loan or in- centive program; estimated 31,000 homes in 1990. High Expanded wood heater loan or in- centive program; estimated 94,000 homes in 1990. Solar active system: Retroht: Low Solar active heating systems de- veloped as "add-on" packages for retrofit; 2,800 units in 1990. High More intensified effort; 28,400 units in 1990. Solar water heating: Low Expanded solar water heating pro- gram with loan or incentive plan; 53,000 units in 1990. High Intensified effort; 163,000 units in 1990. Passivesolar homes(new homes): Low 11,600 units in 1990 - High 27,200 units in 1990 Electrified transportation 200,000 vehicles in 1990 Total, residential -- COMMERCIAL AND INDUSTRIAL (C. & I.) Solar: Low Encourage active and passive solar thermal systems for space and process heat; 10-percent penetra- tion by 1990. High 20-percent penetration by 1990 Biomass: Low Encourage the use of industrial biomass systems for industrial space and process heating applica- tions; 2-percent penetration by 1990. High 3-percent penetration by 199fL C. &l.conservation program~__ Low-interest loans up to $100, 000 to carry out ECO's. Cogeneration: Low Moderate financial assistance pro- gram; favorable standby power rates. High Intensified effort; more attractive financial assistance program. 1979-85 1990 1990 estimated energy capacity capital savings savings requirements (millions of (winter peak) (millions of kilowatt-hours) (megawatt) dollars)' 60 EXISTING AND POTENTIAL TVA CONSERVATION PROGRAMS Program Description 3, 100 1, 412 187.8 22,100 ~754 52.1 ~800 3372 52.8 p2,200 ~1,O52 211.9 170 166 6.2 500 500 18.6 20 18 9.0 180 186 90.8 150 69 67.7 500 211 208.4 70 45 21.5 140 90 43.1 -1,400 -209 14.0 5,000-7, 300 2, 625-3,995 410-825 400 100 20.7 1,200 217 81.6 400 79 41.2 600 118 61.1 6, 300 1, 120 281.0 2, 200 285 20, 5 4,600 625 34.0 9, 500-12, 700 1, 585-2, 080 365-460 4,210-6,075 775-1,285 Total, commercial and industrial. Total residential and 14 500-20 000 commercial and in- dustrial. 1 These include existing programs that will be candidates for expansion and new programs that will be candidates for future investment. The actual investment made could vary somewhat from the estimated capital investment requirements shown here. As more experience is gained some shifts in capital requirements could occur to insure the most cost effective investments are funded. 2 Energy and capacity savings represent insulation savings only. Energy and capacity savings for heat pumps installed in super saver program are included along with heat pumps installed through heat pump financing plan. PAGENO="0065" 61 STATEMENT OP HUGH G. PARRIS, MANAGER OP POWER, TENNESSEE VALLEY AUTEORITY Mr. PAmuis. Thai~ik you, Senator Sasser. I am pleased to be here today to explain how T'VA is planning for the future electric power needs of the Tennessee Valley area, what we expect those needs to be, and what T'VA is doing to meet them. ENERGY CONSERVATION PROGRAM To carry out its responsibilities for meeting the energy nee.ds of the future, TVA needs the authority to borrow funds to provide for the electrical needs of a growing region as well as to support energy con- servation efforts designed to keep electric bills as low as possible. As Mr. Hemphill has explained, we are very optimistic about the possi- bilities of energy conservation measures and new technologies, such as solar, for producing energy. TVA now has what I think is the largest-and the best-energy conservation program in the Nation- .a program that will save the energy equivalent of three or four large generating units by 1990. ` In our response to the `General Accounting Office's `report entitled "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority," it was pointed out that TVA has been actively en- gaged in the implementation and consideration of essentially all of the report's suggested conservation innovations for some time now. In -f act, the report in many ways simply mirrors current TVA programs. And I'd like to offer a copy of our response to the GAO report for the record.1 Senator SASSER. It will be incorporated in the record. `TVA COMMITTED TO ~ow rowEn RATES Mr. PARRIS. There is one area where GAO and TVA do differ, how- ever. The GAO report recommended consideration of a surcharge tha~t would raise T'VA power rates purely for conservation purposes. We support conservation but we retain our traditional commitment to low power rates. While we will use rate design to support conserva- * tion activities, we will never raise rates solely to promote conservation. INFLATION KEY TO rowr~ RAPE INCREASES Our go'il is to hold power rate increases to no more than the r'ite of inflation To accomplish this, it will be necessary to use existing generating facilities as efficiently as possible, encourage as much energy conservation as we possibly can, avoid commitments to faci1itie~ whbth we do not absolutely need, hold down increases in fuel prices to the extent that we can, and in every other way possible conduct our ac- tivities with a. deep regard ,for w~iat cost iii~reases mean to the power consumer. " ` * ` WIlY INCREASED BORROWING AuThORITY IS NEEDED `We c-an set high go~I~ for conservation and for power system `effi'- ciency-and we have. But, we must also be realistic about, future de- 1 See p. 113. 45-720-79-5 PAGENO="0066" 62 mands for electrical energy. This does not mean that we lower our conservation or efficiency goals, but it does mean that we must have the authority to take appropriate action when it is needed to provide sufficient amounts of electric power for the region's needs. This is why TVA will be requesting Congress to increase TVA's authority to borrow by $15 billion. This amount is based upon a load forecast which has projected annual growth rates in electricity consumption of 4.6 percent between 1978 and 1990 and 3.8 percent from 1990 to the year 2000. It assumes a high level of economic growth as repre- sented by employment within the TVA region, a moderate amount of substitution of electricity for natural gas, electricity prices increas- ing no faster than inflation, and TVA's implementing aggressive con- servation programs in its service area. Our current projections take into consideration three different levels of regional economic growth, three different sets of energy prices, three different levels of electricity substitution for natural gas and two different levels of effectiveness of our energy conservation pro- grams. All together we have generated some 54 different projections from these fairly basic sets of assumptions. These are explained in some detail in a paper prepared by Mr. Maxwell which, with your permission, I'd also like to submit for the record.' Senator SASSER. It will be incorporated into the record. ECONOMIC GROWTH IN TVA AREA Mr. PARRIS. Historically, the TVA area has experienced ra pid eco- nomic growth when compared to the Nation. Prior to the 1975 recession, gross regional product in the TVA area grew approximately one and a half times as fast as gross national product. Likewise, total employment in the valley increased much faster than total employ- ment in the TJnited States. This has helped close the gap between incomes in the TVA area and in the Nation. In 1977 TVA area income per capita reached 80 percent of U.S. income per capita. We continue to believe that the region will experience high economic growth rela- tive to the Nation during the coming decade. We can imagine a region growing at a lower rate, energy prices growing faster than the rate of inflation, perhaps some less substitution of electricity for fossil fuels, and lower conservation program effectiveness. Under these conditions,. our capital requirements would be less. We can even postulate a situ- ation where conditions are such that no new powerplants are required beyond replacement of some of our existing facilities as they reach an age where they can no longer be used economically. But this is not in consonance with what we understand to be TVA's responsibility t& the Valley. PROVIDING ENERGY REQUIREMENTS FOR REGIONAL ECONOMY We believe our responsibility to the region requires that we provide' for the energy requirements of a growing regional economy. This is the basis for our $15 billion estimate. The increase would provide for the completion of plants already under construction, the funding of some $1 billion in conservation and! 1 See p. 120. PAGENO="0067" 63. alternative energy investments, additional environmental protection facilities and plant improvements, and the continued development of fuel resources for both coal-fired and unclear generating units. It would also provide full funding for about 7,200 MW of additional generating capacity at an average cost of about $1,500 per kW. This would supplement existing plants either in operation or under con- struction as needed to meet energy requirements. The nature of these plants cannot be identified at this time, but they could be conventional coal-fired or nuclear generating stations, or they could be fluidized-bed combustion plants, cogeneration facilities, fuel cells, or solar or other alternative sources. The actual type of plant will, of course, be deter- mined later in the planning period as our knowledge of needs and the costs of various options becomes more specific. The type of generation is not the issue. What is at issue is the ability to add capacity as it is needed. Approximately 10 to 12 years is pres- ently needed to plan and build power supply facilities. This long lead- time requires that TVA be ready now to make commitments for power needs in the 1990's, FINANCIAL CAPACITY TO MEET GROWTH NEEDS A $15 billion increase in borrowing authority would provide th~ authority to m.ake the commitments required in the next 5 years to insure an adequate long range supply of electricity. Without this in- crease, TVA would not be abl.e to meet the energy demands of sus- tained economic growth in the region which it serves. Admittedly, there is some uncertainty about the exact rate of growth which will occur. Even so, we must have the financial capacity to meet what we consider to be a reasonably probable pattern of growth. In other words, we must plan for what is likely to happen. This is not to say that we will make commitments in the same manner. Future capacity will be committed to only when we are confident that it is needed. Simply put, we propose to commit against the $15 billion only as it is needed. It is possible to calculate our additional requirements for borrowing authority under almost any load growth assumptions. Some additional capacity would be required under most of our forecasts. For example, we estimate that 3,000-4,000 MW of additional capacity would be required before the turn of the century under load growth conditions similar to the low GAO forecast when proper consideration is given to transmission and hop losses, interdivisional TVA loads, and other factors not discussed in the GAO report. But the basic point is that we are not planning on any single forecast. We are looking at the range of alternatives. From this analysis we derive a reasonable basis for proceeding with planning for additional generating facilities subject to changes in the plan as economic and other conditions develop. This becomes the basis for the $15 billion requested increase in borrowing authority $15 BILLION INCREASE ADEQUATE TO FINANCE COMMITMENTS The legislative history of TVA's requests has been one of seeking adequate borrowing authority to fully finance commitment~ con- templated in the following 5 years for the power program. The re- PAGENO="0068" 64 quest for a $15 billion increase in boirowing authority would be ade~ quate to fully finance commitments made through fiscal year 1985. These commitments would include all of the; generating facilities contemplated for 1995 which, because of the 10- to 12-year leadtime, would require action during the coming 5 years. Let me emphasize that we have financial thligations that must be met even if we build no additional plants These involve the comple- tion of plants currently under construction, improvements and addi- tions needed in existing plants, and the funding of conservation and demonstration programS Even under the assumption of no new plant starts, we must have additional borrowing authority. Exhibit 1 to my testimony1 summarizes our existing program and shows how the current construction program might be augmented with additional generating facilities designed to meet the region's energy requirements through 1995 under the forecast described above. Under this projection, commitments of approximately 7,200 megawatts of additional generating capacity would be needed by Exhibit 2 2 presents TVA's estimate position with respect to powei funds and borrowing authority at the end of each fiscal year through fiscal year 1985 As indicated on this exhibit, an increase in the present $15 billion borrowing authority is needed to complete the plants we now have under construction By 1985 about $30 billion of borrowing authority will be required to fully finance the power program, including those capacity additions which must be committed `bytheendoffiscalyear 1985. INCREASED BORROWING AUTHORITY PROVIDES FLEXIBILITY The second thing that I would like to emphasize is that the in~ ci~ease in borrowing authority is not in itself a commitment to invest~ ment in new energy facilities It provides us with the authority to proceed when it is necessary to do so. Such decisions will be made only when it becomes apparent that our existing programs and facil- ities are not adequate to meet future electricity requirements. The $15 billion increase in the borrowing authority provides TVA the ability to meet the region's electrical needs that would result from continued regional growth, aggressive conservation programs, and electricity rates which increase no faster than inflation. The $15 billion would permit TVA to fully finance thO generating facilities obligated by 1985 as well as the cost of carrying out its conservation programs. However, it does not provide for contingencies which may be needed for retirements, cost increases in our present construction program, or additional environmental protection facilities which may be needed in the future. It would be nice if we could hold up our actions until we see what the future is really like. We cannot. We believe that an additional $15 billion of borrowing authority is needed for us to adequately dis- charge our responsibility to the region. What we ask is your support in providing us with the authority to deal with the region's energy `needs. I $ee p 67 2 See p 68 PAGENO="0069" 65 Thank you. Senator SASSER. Thank you, Mr. Parris. PREPARED STATEMENT OF HUGH G. PARRIS, MANAGER OF POWER, TENNESSEE VALLEY AUTHORITY FUTURE POwER NEEDS I am pleased to be here today to explain how TVA is planning for the future electric power needs of the Tennessee Valley area, what we expect those needs to be, and what TVA is doing to meet them. CONSERVATION PROGRAM BEST IN NATION To carry out its responsibility for meeting the energy needs of the future, TVA needs the authority to borrow funds to provide for the electrical needs of a growing region as well as to support energy conservation efforts designed to keep electric bills as low as possible. As Mr. Hemphill has explained, we are very optimistic about the possibilities of energy conservation measures and new tech- nologies, such as solar, for producing energy. TVA now has what I think is the largest-and the best-energy conservation program in the Nation-a program that will save the energy equivalent of three or four large generating units by 1990. In our response to the General Accounting Office report entitled "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority," it was pointed out that TVA has been actively engaged in the implementation and con- sideration of essentially all of the report's suggested conservation innovations for some time now. In fact, the report in many ways simply mirrors current TVA programs. TVA COMMITTED TO LOW POWER RATES There is one area where GAO and TVA do differ. The GAO report reco*m.~ mended consideration of a surcharge which would raise TVA power rates purely for conservation purposes. We support conservation but we retain our tradit'ionar commitment to low power rates. While we will use rate design to support con- servation activities, we will never raise rates solely to promote energy conservation. Our goal is to hold power rate increases to no more than the rate of inflation. To accomplish this, it will be necessary to use existing generating facilities as efficiently as possible, encourage as much energy conservation as we possibly can, and avoid commitments to facilities which we do not absolutely need, and hold down the increases in fuel prices to the extent that we can, and in every other way possible conduct our activities with a deep regard for what cost increases mean to the power consumer. We can set high goals for conservation and for power system efficiency-and we have. But, we must also be realistic about future demands for electrical energy. This does not mean that we lower our conservation or efficiency goals but it does mean that we must have the authority to take appropriate action when it is needed to provide sufficient amounts of electric power for the region's needs. This is why TVA will be requesting Congress to increase TVA's authority to borrow by $15 billion. This amount is based upon a forecast which has pro- jected annual growth rates in electricity consumption of 4.6 percent between 1978 and 1990 and 3.8 percent from 1990 to the year 2000. It assumes a high level of economic growth as represented by employment within the TVA region, a moderate amount of substitution of electricity for natural gas, electricity prices increasing no faster than inflation, and TVA's implementing aggressive conserva- tion programs in its service area. Our current forecasts take into consideration three different levels of regional economic growth, three different sets of energy prices, three different levels of electricity substitution for natural gas, and two different levels of effectiveness for our energy conservation programs. All together we have generated some 54 different forecasts from these fairly basic sets of assumptions. These are ex- plained in some detail in a paper prepared by Mr. Maxwell which, with your permission, I would like to submit for the record. PAGENO="0070" 66 ECONOMIC GROWTH IN TVA AREA Historically, the TVA area has experienced rapid economic growth compared to * the Nation. Prior to the 1979 recession. gross regional product in the TVA area grew approximately one and a half times as fast as gross national product. Likewise total employment in the Valley increased much faste.r than total employ- ment in the U.S. This has helped close the gap between incomes in the PITA area and in the Nation. In 1977 TVA area income per capita reached 80 percent of U.S. income per capita. We continue to believe that the region will experience high economic growth relative to the Nation during the coming decades. We can imagine a region growing at a lower rate, energy prices growing faster than tha rate of inflation, perhaps some less substitution of electricity for fossil fuels, and lower conservation program effectiveness. Under these conditions, our capital requirements would be less. We can even postulate a situation where condi- tions are such that no new power plants are required beyond replacement of some of our existing facilities as they reach an age where they can no longer be used economically But this is not in consonance with what we understand to be PITA s responsibility to the Valley We believe our responsibility to the region requires that we provide for the energy requirements of a growing regional economy. This is the basis for the $15 billion estimate. BENEFITS TO BE DERIVED FROM $15 BILLION INCREASE The increase would provide for the completion of plants already under con- struction, the funding of over $1 billion in conservation and alternative energy investments, additional environmental protection facilities and plant improve- ments, and the continued development of fuel resources for both coal-fired and nuclear generating units. It would also provide full funding for about 7,200 MW of additional generating capacity at an average cost of about $1,500 per kW. This would supplement existing plants either in operation or under con- struction as needed to meet energy requirements The nature of these plants cannot be identified at this time, but they would be conventional coal-fired or fluclear generating stations or they could be fluidized-bed combustion plants, cogeneration facilities, fuel cells, or solar or other alternative sources.. The 7actual type of plant will, of course, be determined later in the planning period ;~S our knowledge of needs and the costs of various options becomes more specific. The type of generation is not the issue. What is at issue is the ability to add capacity at the time it is needed. Approximately 10 to 12 years is presently needed to plan and build power supply facilities. This long lead time requires -~that PITA be ready now to make commitments for power needs in the 1990's. A $15 billion increase in borrowing authority would provide the authority to make the commitments required in the next 5 years to ensure an adequate long range supply of electricity. Without this increase, PITA would not be able to meet the energy demands of sustained economic growth in the region which it serves Admittedly there is some uncertainty about the exact rate of growth which will occur. Even so, we must have the financial capacity to meet what we consider to be a reasonably probable pattern of growth. In other words, we must plan for what is likely to happen. This is not to say that we will make commit- ments in the same manner. Future capacity will be committed to only when we are confident that it is needed. Simply put, we propose to commit against the :$15 billion only as it is needed. It is possible to calculate our additional requirements for borrowing authority ~under almost any load growth assumptions. Some additional capacity would be required under most of our forecasts. For example, we estimate that 3,000-4,000 `MW of additional capacity would be required before the turn of the century *~nder load growth conditions similar to the low GAO forecast when proper con- sideration is given to transmisqion and shop losses interdivisional TVA loads itnd other factors not discussed in the GAO report. PLANNING NOT LIMITED TO SINGLE FORECAST But the basic point is that. we are not planning on any single forecast. We are looking at the range of alternatives. From this analysis we derive a reasonable basis for proceeding with planning for additional generating facilities subject to changes in the plan as economic and other conditions develop. This becomes the basis for the $15 billion requested increase in borrowing authority. The legislative history of PITA's requests has been one of seeking adequate borrowing authority to fully finance commitments contemplated In the following jIve years for the power program. The request for a $15 billion increase in bor- PAGENO="0071" 67 rowing authority would be adequate to fully finance commitments made through fiscal year 1985. These commitments would include all of the generating facili- ties contemplated for 1995 which, because of the 10- to 12-year lead time, would require action during the coming five years. Let me emphasize that we have financial obligations that must be met even if we build no additional plants. These involve the completion of plants currently under construction, improvements and additions needed in existing plants, and the funding of conservation and demonstration programs. Even under the assumption of no new plant starts, we must have additional borrowing authority. TVA SCHEDULE TO MEET ENERGY REQUIREMENTS Exhibit 1 summarizes our existing construction program and shows how the current construction program might be augmented with additional generating facilities designed to meet the region's energy requirements through 1995 under the forecast described above. Under this projection, commitments of approxi- mately 7,200 megawatts of additional generating capacity would be needed by 1985. The energy provided by these plants could be supplied by a variety of power supply technologies, including cogeneratiori, fuel cells, or fluidized-bed combus- tion plants, where these options prove to be economical. The type of capacity would be determined late in the planning process. No retirement of existing facilities was considered in determining the need for new facilities even though 40 of TVA's 03 coal-fired units will have been in operation in excess of 40 years by 1995. In addition, no contingencies have been included for additional environ- mental protection facilities beyond what is presently required. POWER FUNDS AND BORROWING AUTHORITY Exhibit 2 presents TVA's estimated position with respect to power funds and borrowing authority at the end of each fiscal year through fiscal year 1985. As indicated on this exhibit, an increase in the present $15 billion borrowing authority is needed to complete the plants we now have under construction. By 1985 about $30 billion of borrowing authority will be required to fully finance the power program, including those capacity additions which must be committed to by the end of fiscal year 1985. The second thing that I would like to emphasize is that the increase in borrow- ing authority is not in itself a commitment to investment in new energy facilities. It provides us with the authority to proceed when it is necessary to do so. Such decisions will be made only when it becomes apparent that our existing programs and facilities are not adequate to meet future electricity requirements. The $15 billion increase in borrowing authority provides TVA the ability to meet the region's electrical needs that would result from continued regional growth, aggressive conservation programs, and electricity rates which increase no faster than inflation. The $15 billion would permit TVA to fully finance the generating facilities obligated by 1985 as well as the cost of carrying out its conservation programs. However, it does not provide for contingencies which may be needed for retirements, cost increases in our present cosistruction pro- gram, or additional environmental protection facilities which may be needed in the future. It would be nice if we could hold up our actions until we see what the future is really like. We cannot. We believe that an additional $15 billion of borrowing authority is needed for us to adequately discharge our responsibility to the region. What we ask is your support in providing us with the authority to deal with the region's energy needs. EXHIBIT 1 SCHEDULE AND COST OF FUTURE CAPACITY ADDIT IONS ON TVA SYSTEM Plant Commercial operation date Total cost ($10) Size (MW) Dollars per kilowatt Seguoyah October 1979, June 1980 Watts Bar June 1980, March 1981 Bellefonte September 1981, June 1982 Hartsville June 1983, June 1984, December 1983, December 1984. Phipps Bend August 1984, August 1985 Yellow Creek May 1985, May 1986 Investments in future power facilities committed by 1985. 1, 300 1, 270 1, 625 3,500 1,800 2,400 11, 250 2, 441 2, 540 2, 664 5, 148 2,574 2,750 7, 200 533 500 610 680 699 873 1, 560 PAGENO="0072" 68 EXHIBIT 2 OBLIGATIONS, BORROWING AUTHORITY, AND BORROWINGS THROUGH 1985 [In millions of dollarsr 1978 1979 1980 1981 1982 1983 1984 1985 Outstanding obligations 9,356 11987 14, 472 16, 600 18,200 19,200 20, 200. 20,800 Cost to complete plants through YeIIpw Creek 6 392 4 986 3 733 2 500 1 500 700 200 100 Cost to complete plants after Yellow Creek 3, 500 3, 200 2, 900 7, 200 9, 700 Required borrowing authority 15 748 16 973 18 205 22 600 22 900 22 800 27 600 30 600 Outstanding borrowings 7, 195 9, 300 11, 100 12, 850 14, 100 15, 800 17, 300 18, 100 Senator SASSER. Let me ask you a question about your charts there. On exhibit 2 you've got "Cost to complete plants after Yellow Creek." When i:S Yellow Creek scheduled for completion? Mr. PAmirs. In 1986, sir. INCREASING COSTS OF CONSTRUCTION PROJECTS Senator SASSER. All right. Why is your figure going up there, 1984, 1985-why is your figure going up there from 2.9 to 7.2 and then-I believe that's 9.7 in 1985. Mr. PARRIS. Is the line that you're referring to the cost to complete plants through Yellow Creek or beyond Yellow Creek? Senator SASSER. I'm looking at the "Cost to complete plants after Yellow Creek," is the way you have it- Mr. PARRIS. That represents the commitments for the 7,200 mega- watts of additional capacity in the timeframe that I mentioned in my testimony. And because of the lead time for new capacity to which TVA would be. having to commit additional facilities as we move through time. That's the reason that those numbers are increasing. Senator SASSER. Thank you, Mr. Parris. Mr. PARRIS. Thank you. Mr. FREEMAN. I believe that completes our prepared testimony, Senator. EFFECT OF SMALLER INCREASES IN BORROWING AUTHORITY Senator SASSER. All right. I've got a few questions, Mr. Freeman, that I think it might be appropriate to ask Just to sort of review the history of TVA's borrowing over the years, in 1959 TVA, when it first began to raise capital through the Federal Treasury, the debt ceiling was placed at $750 million. In 1966 it was raised to $1.75 billion. In 1970, the ceiling was raised again to $5 billion.. And then in 1976, ac- cording to our figures it was increased by $10 billion, to a total debt ceiling of $15 billion. Now, there was considerable discussion at that time on the Senate Budget Committee with regard to increasing the debt ceiling $10 billion, and assurances were given at that time that this $10 billion increase would be adequate for at least the next 6 years, but here we are 3 or 4 years later coming back for an additional $15 billion increase on top of the original $10 billion increase. I'm going to be asked these questions by my colleagues on the Budget Com- mittee. Now the proposal has been made and been advanced, that the debt ceiling of TVA be increased, if it is to be increased, by smaller mere- PAGENO="0073" 69 ments as the funds are actually needed rather than the $15 billion which is being proposed. Now how do you react to that? Mr. FREEMAN. Well, I think that would be a very bad mistake in terms of enabling us to keep the lights on in the Tennessee Valley. As I tried to' explain in my testimony, the impact of inflation has just been devastating. The $15 billion that we are seeking has the purchasing power of $10 billion in 1975 dollars. This is the ~same as the last time we came up, and has the purchasing power of $7 billion in 1970 dollars. The borrowing authority we are seeking for now represents our best judgment, considering inflation; of the full fund- ing required to meet the additions to our power supply we would have to order, over the next 5-year period, for delivery through 1995. In 1975 and 1976, not only the TVA Board, but a lot of other institutions in this country, grossly underestimated the impact of inflation. Other factors too have affected the increased cost of our powerplants. There has been slippage in the timetables, as you know, and because of those slippages the building of those plants has taken more person-hours than we had estimated. IMPACT OF NRC SAFETY REQuIREMENTS Another fact is that the Nuclear Regulatory Commission has im- posed additional safety requirements. I'm not quarreling with those requirements-we want those plants to be as safe as we know how to make them-but the requirements have caused plants to be retro- fitted. We had not counted on tearing materials out and building them back. I think it's good that we did make the safety improve- ments, but it has cost more money. INTEREST RATES INCREASE COST OF PLANTS We had not contemplated that the interest rates would go up the way they have. They are very capital-intensive facilities so interest costs during construction add substantially to the project cost. Higher interest rates mean large increases in the costs of plants. The bottom line, however, is that the Tennessee Valley Authority is building these nuclear plants at about 25 percent less per kW hour than utilities in our part of the country and at costs less than the average throughout the Nation. We want to do an even better job. Since I've been on the Board we have commissioned Theodore Barry and Associates to make an independent study of our construction program. That study has been completed and we are incorporating and implementing their recommendations. We intend to do better, and do the very best we know how. We have a record that I think will withstand scrutiny, but it must be scrutinized, as you suggest. CONGRESSIONAL OVERSIGHT OF TVA Senator SASSER. Well, the General Accounting Office suggested, I think, this morning that there be more congressional oversight over TVA and over TVA's activities, and one suggestion has been made that the $15 billion be gleaned through `Federal appropriations, and this ~vould give the Congress more oversight responsibility of TVA. What's your reaction to that? PAGENO="0074" 70 Mr. F1n~EMAN. Well, my reaction is that we welcome oversight in the form of hearings like you're conducting today and we believe that our actions not only will withstand scrutiny but we hope that we will have a lot to tell the Congress about. But to go back to usingthe appro- priations process to finance the TVA Power System would, I thmk, threaten our utility responsibility in a ~ cry fundamental way The budget cycle is a 2 year cycle I don't know any way that we effectively can plan and make investments in a power system under a budget cycle which would require us to make decisions, firm decisions- we're not talking about borrowing authority, we're talking about firm decisions-2 years in advance of the time that we got the money. That would put us in a situation where each year there would be great uncertainty about how much money we would have to invest. It also would mean we would be competing for Federal funds with the rest of government. Those handicaps are inconsistent with carrying out a utility responsibility which must be met The Congress and TVA struggled with this question back in the 1940's and 1950's. There was a grand debate and a great compromise. A wall was put around TVA; its service area was defined like any other organization with utility responsibility. We were taken off of appropriations and given the authority to borrow money outside the government. We feel that com- promise has worked well for 20 years. While it may be nice to think about going back and getting appropriations and not having to pay 91/2~ and 10-percent interest for money, I believe the people of the Ten- iiessee Valley are prepared to pay their own way. We're not asking for any subsidy from any other part of the country and we don't intend to subsidize them either. The statutory provisions with respect to TVA since the self-financing act have worked well, and, I would say, in a sense, "if it ain't broke, let's don't fix it." EPA/TVA AGREEMENT ON COAL GENERATING FACILITIES STRATEGIES Senator SASSER. You know what happened to the last man who said that, Mr. Freeman. Let me just ask you one question here. In mid-December the TVA Board agreed to a settlement with the Environmental Protection Agency to bring its coal generating facilities into compliance with the EPA regulations Now this proposed consent decree has been much discussed, and I might say cussed in some areas, and criticized by some as going too far and being too costly, and hailed by others as a great achievement. Now, the capital investment required to comply with this settlement will be raised through TVA's bonding authority, as I understand it. Now the General Accounting Office report deals at length with this proposed consent decree. The report outlines several different strategies TVA could utilize in complying with the Federal air pollution laws. I think there are basically three. GAO APPROACHES TO AIR POLLUTION CONTROL First, GAO outlines what it terms the "least cost strategy" Now that strategy calls for the choice of double alkali scrubbers for 12 of TVA's coal-fired generating units. The total capital cost of this strategy is $171 million, with an annual operating cost of $49 million. Now the second strategy which the report outlines calls for a na- PAGENO="0075" 71 tional demonstration of a wide variety of flue-gas desulfurization technologies, including some of which have yet to be proven. Now this strategy according to GAO, would have a total capital cost of $237 million and a total annual operating cost of $70 million. Now, GAO's third strategy outlines what they consider a maximum environmental protection strategy and this would call for outfitting nine units with sodium sulfite scrubbers and three units with mag- nesium oxide scrubbers. And this maximum environmental protection strategy, according to the General Accounting Office, would have a capital cost of $257 million, and an annual operating cost of $117 million. Now clearly we're talking about a lot of money. TVA/EPA METHOD MORE COSTLY THAN GAO~S Now, Mr. Freeman, I've reviewed the proposed consent decree, and the Tennessee Valley Authority has agreed on compliance methods which have a total capital cost of more than $1 billion and an annual operating cost of $447 million. In other words, it appears to me that TVA has agreed on a method of compliance that appears to cost four times more than the maximum environmental protection strategy outlined by GAO. Now, by agreeing to this proposed settlement TVA itself, I'm told, has announced that wholesale rates will in~ crease by 12 percent in the next 5 years. Now clearly, and I don't think anyone would argue, TVA should comply with the require~~ ments of the Clean Air Act. TVA's got to obey the law like every othe.r citizen. But the issue is whether TVA is proposing overcompli- ance and proposing a much more expensive method than is necessary and I'd like to get your comments on that. PVA/EPA M~tttOI~ CHEAPER THAN GAO~S Mr. FREEMAN. My reply is that we have agreed to the method of compliance which is the least cost method of compliance, not just in my opinion, but in the opinion of the people on our staff in the power organization who have struggled with this problem for a very good percentage of their professional lives. I don't have a photographic mind, but my recollection of the GAO report is that they were dis- cussing only a portion of the cleanup campaign that we were forced to undertake. If you will give us the privilege of supplying, for the record, a comparable cost analysis, I think we'll be able to show you that our method of compliance is, in fact, the least cost, and less costly, than any of the options the GAO suggested. They're talking about a number of experimental scrubber-type technologies that are not commercially feasible yet. Using the technology GAO proposes would not enable us to comply in the decade of the 1980's when we already are years out of compliance. Also, they appear to be suggest- ing some compliance strategy, from what you have just said, that seems to me to be much more expensive than what we agreed to. Also, it does not take into account the concessions we got from EPA in our negotiations. If you would permit us the privilege of giving you a detailed comparable analysis, I believe we can document my comments. PAGENO="0076" 72 Senator SASSER. We'll certainly leave the record open. for that, Mr. Freeman, because it's a matter of some concern, considerable concern, when we see that TVA is going forward with, what on the surface appears to be, a method of complying with EPA's requirements that is four times more expensive than what the General Accounting Office has said might be necessary. GAO METHOD NARROW AND UNPROVEN Mr. FREEMAN. Senator, the numbers in the GAO report, as I hear you, referred only to the cost of some scrubbers. Our program includes investments that we've had to make to clean up particulate matter and a number of other items. The record should not be left with the in- ference that the GAO numbers are comparable to the $1 billion num- ber that TVA is using. And, even leaving these other large considera- tions aside, GAO is talking about scrubbers that are theoretical and, I think, in some cases more expensive. They do not have a compliance strategy laid out in their report that would comply with the law. They talked about our experimenting with different types of scrubbers. Indeed, I submit that they were talking about options that would be tremendously more expensive if you consider that reliable electric power is worth more than unreliable electric power, and I think that you will find that most of our customers expect reliable electric power. Senator SASSER. Well, I think that when you have this sort of basic ~confiict between two reputable and respected agencies of government, we need to get it resolved and lay this controversy to rest. Mr. FREEMAN. To my knowledge, the GAO has not commented on our settlement proposal as such, even though the settlement is a matter of public, record. But we will supply a comparable analysis. Quite frankly, I did not read the GAO report as purporting to corn-. ment on our total settlement package but only suggesting, essentially, ~that we put a lot of scrubbers in. LThe information follows:] AN ANALYSIS OF THE TVA SULFUR DIOXIDE COMPLIANCE COST FIGUXES AND THE GAO REPORT The cost estimates in the General Accounting Office report, "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority," are not com- parable to TVA's estimates for two reasons. (1) The GAO figures cover only the cost of double alkali flue gas scrubbers for SO2 compliance at four plants; TVAs cost is for both SO~ and particulate control at 10 coal-fired generating plants. (2) In addition, GAO understates the cost of double alkali scrubbers which in any event are not now sufficiently developed for large-unit installation. PALLACY OF COST COMPARISON The basic fallacy of the cost comparison Is that the GAO report discusses ~only the cost of scrubber Installation and operation, not the entire air corn- ~liance program. Scrubbers are being installed on portions of only 4 plants - whereas the TVA program covers 10 coal-fired generating plants, not just the .4 mentioned in the report. At six plants, SO2 compliance will be achieved solely by switchipg to new supplies of low-sulfur coal. The increased cost of this fuel is not included in the GAO figure. In addition, our program covers particulate removal equipment (precipitators and baghouses) which also is not included in the GAO figure. TVA's strategies at each plant were developed to keep compliance costs to a minimum. Scrubbers are only being installed where that is the least costly method of obtaining required emission reductions. Where scrubbers are being PAGENO="0077" 73 installed, the leaa~t `expensive scrubbing system was selected. At Cumberland the cost estimates are based on the least expensive system for that plant (lime- tone) although it is hoped that an innovative system will be installed there. The strategies are summarized in the attached Table A. These same strategies were summarized in table 6-2 of the GAO report. TVA has estimated the total capital cost of this program to be $1.02 billion and the total annual cost of the program to be $447 million (1982 dollars) as shown on the attached Tables B and C. TVA ESTIMATE OF COST OF SCEUBBEE OPERATION Of necessity, GAO's cost estimates are generalized estimates that do not take account of site-specific or back-fit problems. TVA estimates were originally developed on a plant-by-plant basis and have now been supported by detailed engineering studi~s. In the case of the Widows Creek and Paradise scrubbers, the estimates have been supported by bids submitted by potential contractors. TVA's estimated capital and annual operating costs for the scrubber installa- tions are as follows: Scrubber capacity-MW Scrubber type Millions of 198 ` 2 dollars Capital cost Annuai cost Cumberland Johnsonville Paradise Widows Creek Total 600 2 600 2 1, 408 575 3, 183 Undecided-cost estimated based on lime- stone. Magnesium oxide Limestone do Total 90 185 220 54 27 36' 6Z 217 549 145 1 Annual costs include amortization of investment over the remaining life of plant. For the limestone scrubber installa~ tions, costs include sludge stabilization, and disposal. For magnesium oxide installation, costs include acid plant, regenera- tion plant, and credit for sale of recovered sulfuric acid. 2 Does not include approximately 20 percent redundant scrubbing capacity to improve system reliability. In addition, TVA has installed and is operating a limestone scrubber at its' Widows Creek Steam Plant unit 8. This unit has a capacity of 550 MW. The capi- tal cost of the scrubber was $54 million and the annual cost is $20 million. Even if it were technically feasible to install double alkali scrubbers on the scale envi- sioned by GAO, TVA estimates that the cost would be about 5 percent greater than the estimates shown above. By comparison, table 6-5 of the GAO report indicates that double alkali scrub- bers could be installed on 3,183 MW of capacity at a capital cost of $171 million and an annual operating cost, excluding waste disposal, of $47.8 million. If the cost of waste disposal is included, as it is in TVA's figure, the annual cost is $74.1 million. These estimates of FGD system costs are not directly comparable, how- ever. In the ease of the TVA estimates, the scrubber costs are site specific, reflect- ing particular engineering and layout features at the plants which can have a significant impact on cost. For example, at the Johnsonville Steam Plant, flue gas must be carried from the powerhouse roof through new ductwork to ground level where the scrubbers will be located, then exited through a new ground-based chimney. These features can add significantly to the cost. The estimates in the GAO report are, by necessity, generic estimates and are not based on specific site features. In general, such estimates are normally most applicable to new sources where the scrubbing facility is designed and located in an optimum manner while the overall plant structures are being designed and located. Furthermore, TVA capital cost estimates are based on costs that are expected to accure while these facilities are being constructed, i.e., during the 1979-82 period. TVA's annual cost estimates are in 1982 dollars. Thus, several years of inflationary effects separate the TVA and GAO estimates. Finally, the TVA estimates include a substantial cost for backup scrubber capacity at its Johnsonville and Paradise Steam Plants. At Johnsonville, a spare scrubber train with a capacity of 200 MW is being installed on each unit SO that, in the event that one of the five remaining trains malfunctions, the scrubbing facility will still be able to accommodate all the flue gas. The GAO report recommends that TAV follow a maximum demonstration and development path at the four plants at which scrubbers are being installed. In substance, TVA is doing exactly this at no extra cost to the ratepayer. In making PAGENO="0078" 74 this recommendation GAO developed what it termed a ledst lOgt scrubber program dependent upon double alkali scrubbers. The GAO estimates drastically under- state the cost of double alkali scrubbers. In any event we do not feel that they are sufficiently developed to allow large-scale installation at this time. Even if they were a developed system, the cost of the GAO least-cost approach would be greater than the cost estimates PVA has developed for its program. TVA does not believe that double alkali scrubber technology is sufficiently proven to warrant installation on the scale (3,183 MW) included in the GAO analysis. While TVA is considering the installation of 600 MW of double alkali scrubbers at its Cumberland Steam Plant, we do not propose to make such a selec- tion until additional test information is available, which we expect during the summer of 1979. This assessment of the feasibility of installing double alkali scrubbers appears to be consistent with the assessment of other power systems since double alkali scrubbers comprise only 3 percent of the total scrubber instal- lation either operational, under construction, or planned, whereas lime/limestone kscrubbers make up nearly 90 percent of the scrubber capacity. $Q~ PROGRAM CO2~STRAINED ISY AIR QUALITY STANDARDS !PVA9s sulfur dioxide control program is constrained by the requirement that ~ompliance with state and Federal air quality standards be achieved as rapidly us possible. However, TVA has not sacrificed the research and development oppor- lunities this massive control program offers. The flue gas desulfurization equip- inent TVA is installing will employ a variety of designs, including advanced tech- ~nology systems, and will significantly advance scrubber development. At our Para- dise and Widows Creek plants we will be installing limestone scrubbers which will provide TVA an opportunity to continue its research in methods of achieving greater removal efficiency from this type of equipment and also to develop solu- tions to the problem of long-term sludge disposal. On the Johnsonvllle plant we are Itistalling an advanced magnesium oxide scrubbing system which will produce sul- furic acid, a useful byproduct, instead of sludge. At Cumberland we are hoping to he able to use an advanced scrubbing system, utilizing an entirely new tech- nology; however, these plans will be dependent upon the approval of a suitable schedule by EPA and the other plaintiffs in the litigation. We believe this mix of scrubber systems will provide all of the research and development benefits that the report recommends. It is significant that what GAO actually recommended was: In complying with the proposed consent decrees, TVA should follow the maxi- mum demonstration and development of flue gas desulfurization technologies in its coal-fired units, as proposed in chapter 6. Such a program would cost more than simple compliance would require and would entail certain risk. We recommend, therefore, that TVA request an appropriation for this program for those costs over and above simple compliance. TABLE A.-SULFUR DIOXIDE AND PARTICULATE COMPLIANCE METHODS AND SCHEDULES Plant Emission limitation Compliance method Date Allen 4.0 lbs SOn - Medium-sulfur coal May 1, 1979 0.10 lbs particulates Modified precipitators Sept. 1, 1978 Colbert 4.0 lbs SO~ Medium-sulfur coaL___ Aug. 1,1979 Cumberland 4.2 lbs SO2 -- Coal washing plus partial' scrubbing (600 Dec. 31, 1982 MW). 0.10 lbs particulates New precipitators May 1, 1982 Gallatin 5.0 lbs SO2 - Medium-sulfur coal Nov. 1,1978 0.10 lbs psrticulates New precipitators June 15, 1979 Johnsonville.. 3.4 lbs SOs Partial magnesium oxide scrubbing (600 Dec. 1, 1982 MW) and medium sulfur coal. iGngston 2.8 lbs SO~ Medium-sulfur coal July 1, 1979 Paradise 3.1 lbs SO2 Coal washing plus scrubbing units 1 and 2 Sept. 1, 1982 (1,400 MW). 0.11 lbs particulates New precipitators on unit 3 plus scrubbing Do. 1 and 2. Shawnee 1.2 lbs SOs Low-sutfur coal Oct. 1,1981 0.11 lbs ~articulates Baghouses Nov. 1, 19R1 Watts Bar 4.0 lbs SO2 Medium-sulfur coal Dec. 1,1978 0.14 lbs particulates Modified boiler July 1, 1981 Widows Creek 1.2 lbs SOs Low sulfur coal (units 1-6) and limestone Sept. 1, 1981 scrubbing (units 7 and 8). 0.12 lbs particulates Scrubbihg (unit 7) Do, 1 To be modified if advanced design scrubbing utilized. PAGENO="0079" 75 TABLE B.-SULFUR DIOXIDE AND PARTICULATE COMPLIANCE METHODSAND ESTIMATED COSTS UNDER PROPOSED SETTLEMENT [In millionsi Plant Annual cost of Compliance Capital 1982 dollars investment Sulfur dioxide: Allen: Medium-sulfur coal.. Colbert: Medium-sulfur coal Cumberland:Coalwashingandpartialscrubbing Gallatin: Medium-sulfur coal Johnsonville: Partial scrubbing and medium-sulfur coal Kingston:Medium-sulfurcoal Paradise:Coalwashingandpartialscrubbing Shawnee: Low-sulfur coal and baghouses Watts Bar: Medium-sulfur coal Widows Creek: Partial scrubbing and medium-sulfur coal Total, SOS only Particulates: New precipitators at Cumberland Paradise unit 3, and Gallatin - - - -- Total $8 12 59 $160 13 46 185 33 94 350 86 80 0 67 1 54 - 418 829 29 191 447 1, 020 1 Not including existing unit 8 scrubber. TABLE C.-BREAKDOWN OF SULFUR DIOXIDE COMPLIANCE COSTS AT PLANTS WITH MORE THAN 1 COMPLIANCE PROJECT [In millions of dollarul Plant Annual Cost of compliance 1982 dollars Capital investment Cumberland: Coal washing Scrubbing Johnsonville: Medium-sulfur coal Scrubbing Paradise: $32 27 10 36 $70 90 185 Coal washing Scrubbing Shawnee: 32 62 130 220 Low-sulfur coal Baghouses Widows Creek: 13 80 Low-sulfur coal 27 Scrubbing 40 i 54 1 Not including existing unit 8 scrubber. ECONOMIC IMPACT STATEMENT ORDERED ON AGREEMENT Senator SASSER. Well, I want to point out that on January 30, Fed- eral District Judge Torn Wiseman of the middle district of Tennessee, refused to rule on the proposed consent decree. Judge Wiseman ordered an economic impact statement on the cost of this agreement and its estimated impact on inflation. And if there's no objection, I'd like to insert Judge Wiseman's order in the record at this point. [The order follows:] PAGENO="0080" 76 IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE, NASHVILLE Divisiox No. 77-3390--NA-CV TENNESSEE THORACTIC SOCIETY, ET AL., PLAINTIFFS UNITED STATES OF AMERICA, INTERVENING PLAINTIFF V. AUBREY WAGNER, ET AL., DEFENDANTS* ORDER The Court is in receipt of a proposed consent decree submitted by the parties in this case. Before acting on the consent decree, the Court is of the opinion that it is essential to have information regarding the economic impact of such a consent decree on the residents and consumers of electricity in the Tennessee Valley. It is therefore ORDERED that both parties prepare and submit to the Court an economic impact statement, including the estimated increased cost per month per residential user expected to result from the implementation of the consent decree, as well as the estimated impact on inflation, including increased cost to commercial and industrial users and any such cost expected to be passed on to consumers. The Court will reserve approval of the consent decree until the parties have submitted such economic impact statements. United States District Judge. ADMINISTRATION VIEW OF AGREEMENT Senator SASSER. Mr. Freeman, I'm in receipt of a letter from the Honorable. Barry Bosworth, who is Director of President Carter's Council on Wage and Price Stability. And on January 10, Barry Bosworth corresponded with Mr. E. G. Chaves of the Consolidated Aluminum. Co. [The letter follows:] EXECUTIVE OFFICE OF THE PRESIDENT, COUNCIL ON WAGE AND PRICE STABILITY, Washington, D.C., January 10, 1979. Mr. E. 1. CRAVES, Consolidated Aluminum Co., St. Louis, Mo. DEAR Mn. CHAVES: Thank you for your mailgram of December 13, calling our attention to the pending action of the TVA Board on the proposed settlement with EPA. Unfortunately, because of the large volume of correspondence which we are receiving each day, your mailgram did not come to my attention until after action had been taken by the TVA Board. However, I did request last fall that the TVA Board review the proposed settle- ment in light of the fact that essentially the same environmental result could be achieved at a lower cost. The TVA Board has chosen to adopt the proposed settle- ment. As a result, this decision will impose an unnecessary cost burden on the residential and industrial users of electric power in the Tennessee Valley. Sincerely, BABEY P. BOSWORTH, Director. Senator SASSER. But in this letter, Mr. Bosworth states, and I quote, "I did request last fall that the TVA Board review the proposed set- tlement in light of the fact that essentially the same environmental re- sult could be achieved at a lower cost." Still quoting, "The TVA Board has chosen to adopt the proposed settlement. As a re~ult, this decision will impact an unnecessary cost burden on the residential and indus~ PAGENO="0081" 77 trial users' of electric power in the Tennessee Valley area." Now that's what Barry Bosworth says. Now, Mr. Freeman, the President's Coun- cil that is charged with monitoring inflationary practices is saying in essence that TVA was told last fail that the proposed settlement is unnecessarily high and could be achieved at a lower cost. Now here again, why did we enter into this agreement between TVA and EPA on this proposal agreement in the face of this information? ADMINISTRATION DOESN'T UNDERSTAND PROBLEM Mr. FREEMAN. Mr. Bosworth is just badly mistaken, he's just as wrong as he can be. He doesn't have the foggiest idea of what he's talk- ing about on this subject. I did receive a communication from him. He's quarreling with the law passed by the Congress of the United States aud the law as declared by the Supreme Court of the United States; with respect to TVA and as modified in the 1977 Clean Air Act. And he is suggesting that that law, perhaps, should be different. But the law has been settled in this case and there was nothing more to litigate. Senator SASSER. Well, as I understand what Mr. Bosworth is saying in his letter, he is saying that TVA could have complied with the re- (luirements of the law, with the requirements of EPA, at a much lower cost than you did and Mr. Bosworth's opinions appear to be bolstered by the statements made by GAO', which indicate according to them you're paying four times too much. TVA/EPA SETTLEMENT COST NOT CHALLENGED Mr. FREEMAN. Mr. Bosworth is mistaken and the GAO report, I respectfully suggest again, does not purport to comment on our settle- ment or suggest that our settlement is not at lowest cost. I was making suggestions about types of technology and simply added up costs for the number of theoretical scrubbers it was talking about. GAO didn't include an awful lot of other expenses that the settlement required. The position of Barry Bosworth dealt with the stringency with which the law should be enforced and that was not decided `by the TVA. TVA took that question to the EPA, took it to the court of appeals, and took it to the Supreme Court, but certiorari was denied. When I came to TVi~, Mr. Lynn Seeber, the General Manager, came to me and he said: Dave, we don't have anything to fight about anymore. We've got to settle this matter so we'll know what to do and keep these powerplants running. We laid out a settlement strategy that was concurred in by our Man- ager of Power and everyone else, and may I say, Senator, probably the most money I've saved for the consumers `in the Tennessee Valley since I've been here is the result of the effort I `put into negotiating that set- tlement agreement. That agreement will withstand scrutiny by anyone. We had two choices; to go on with the litigation and run the risk of litigation in which the State of Alabama and the State of Kentucky were suing us, as well as the EPA, and where we would run the risk of fines and timetables that would be more stringent and more costly, and would require more scrubbers. We negotiated. We took advantage of the amendments that you and Senator Baker got with respect to the Kingston plant and the Johnsonvilie plant, advantages that we prob- ably wouldn't hav~ gotten in litigation. C)ur judgment is that we got a 45-720-79-----6 PAGENO="0082" 78 good settlement Senator, you're a lawyer and you know that in liti gation the lawyers and the clients have to make judgments There were iio issues left to litigate The standards were set by law The only issues were the methods and the timetable TVA/EPA AGREEMENT BAD SETTLEMENT Senator SASSER. Well, you see, here's the problem. Here's why I have problems following you entirely on that, Mr. Freeman. Now the General Accounting Office in its report, pages 6-18, outlines three strategies for clean air compliance by TVA, at least cost, maximum en- vironmental protection and then the third one is a demonstration and they say you can comply with one fourth of the cost I mean, there are such things in the practice of law as bad settlements and I've seen lawyers make bad settlements. I might have made one or two myself. And what we're questioning here is whether or not TVA has made a bad settlement with the Environmental Protection Agency. Mr. FREEMAN. I respectfully suggest that the GAO report does not provide any evidence on that issue one way or the other. It doesn't talk about the washing plants, the precipitators, and other equipment that are included in the $1 billion figure The $1 billion figure is just not comparable with the GAO numbers, Senator And I don't recall any- thing in the GAO report that spoke to our settlement agreement or purported to make that comparison So that I think that we just simply have an orange there that you're trying to compare with an apple. Senator SASSER. Well, the General Accounting Office does not refer specifically to your settlement agreement. But what it does refer to are three strategies by which you can comply with requirements of the Environmental Protection Agency and all of them are dramatically cheaper than the consent decree or the agreement TVA entered into. GAO STRATEGIES DON'T COVER ALL COSTS Mr FREEMAN I respectfully differ, Senator They are not dramat ically cheaper, they do not cover most of the items of expense that are included in our $1 billion figure. Senator SASSER. Well, Mr. Freeman, we're going to pursue this fur- ther, and we look forward to getting data from you which we can in- corporate in the record which will support TVA's position on this consent decree matter. As I understand it, Judge Wiseman's left the record open for additional comment on it before adopting a consent decree. Is that correct? Mr FREEMAN Yes, sir, that's correct The record is open, this is a procedure that is customary in settlements such as this to give the nublic a chance to comment ~nd those comments can be filed with the Department of Justice, which will file them with the court. RATEPAYER COSTS OF TVA PROGRAMS Senator SASSER. Moving on to something else. The TVA's testimony is concentrated on additional power supply needs to support an in- crease in the bonding authority. Now there are two other major costs facing TVA in the next decade, one we've just discussed, is the imple PAGENO="0083" 79 :rnentation, of the consent decree with the Environmental Protection Agency. The other involves TVA's interest in building their own "away from reactor" storage facility for spent fuel from a nuclear reactor. Now my question is, what means of funding does TVA intend `to utilize in implementing both of these programs, that is, your consent `decree and building your "away from reactor" storage facilities for `spent nuclear fuel? Mr. FREEMAN. Compliance both with the Clean Air Act and the Nuclear Regulatory Commission's requirements on a nuclear site are `necessary costs of our power program. Funding for both programs you cite would be power expenses. To the extent that they represent capital items, they are reasons why we need the borrowing authority. To the extent that they represent expenses, they are power system `costs that would be borne by the ratepayers. COST OF DISPOSITION OF SPENT NUCLEAR FUEL Senator SASSER. So ultimately, the ratepayers pay for the consent decree that you've entered into wi.th EPA and ultimately the rate- payers, as you say, pay for the "away from reactor" storage of this spent fuel. This burden ultimately fails on the ratepayer? Mr. FREEMAN. Let me make clear, Senator, that the TVA Board has not decided on an "away from reactor" facility for the spent fuel. We have `before us the basic issue of whether the spent fuel will be stored `at the reactor site or whether we will build "away from reactor" facil- ities. The spent fuel is a reality as we generate nuclear power and we `are facing up to this heavy responsibility. TVA will be making a de- cision in broad daylight to decide which option to pursue. That will come up for decision, we hope, this summer. But we have not decided to build an "away from reactor" storage facility; we have decided to face up to our responsibilities to have public participation in that decisionmaking process and to make a decision. Senator SASSER. Well, paying for the consent decree, cleaning up your coal-fired plants, and if you decide to pursue the "away from reactor" storage concept, I assume both of these would be paid for out of the $15 billion ceiling that you're seeking to have lifted. Mr. FREEMAN. If I may, I would prefer to say that we are meeting the necessary expenses to comply with the Clean Air Act and the Atomic Energy Act, which are necessary expenses of producing coal- fired and nuclear-fired power. The- COMPLIANCE WITH EPA STANDARDS AT LOWEST POSSIBLE COST Senator SASSER. Well, I want to make it clear, Mr. Freeman, that I'm not quarreling at `all with your willingness to `comply with the EPA standards. T'hat's the law of the land and they should be complied with. I'm only questioning whether or not we're in a posture of overcom- pliance and if we are in a posture of overcompliance then the rate- payers in the Tennessee Valley area are going to have to pay for that overcomplianee. I'm eager to see that we comply with EPA standards, that TVA does, but I'm also equally eager to see that TVA comply with them at absolutely the lowest possible cost. Mr. FREEMAN. Senator, no one is more eager to do that than I am. I respectfully suggest that we have done a very good job of getting PAGENO="0084" 80 out of the almost decade-long turmoil of getting in compliance with the Clean Air Act at the lowest cost to the TVA ratepayer. This is not just my opinion but is in the judgment of our Manager of Power, our General Counsel and every other TVA staff official who struggled with this issue over this long period of time. Indeed, after counseling with the executive committee of our distributors, they were persuaded that our judgment was a sound one. ELECTRONIC CONTROL OF ENERGY-USING APPLIANCES Senator SASSER. Now water heaters account for almost 24 percent. of the power used among TVA's residential customers. Now the GAO report analyzes several load management alternatives including time- of-day pricing and controlling water heaters by radio or by micro- wave. A similar suggestion has been made with regard to air-condi- tioners. Now I'm aware that the T'STA is exploring these areas for possible application in the region. I think they have been applied, not in this country but perhaps in other countries. Now how would suck a system for hot water heaters and air-conditioners work? Mr. FREEMAN. If I may, Mr. Hemphill here, who is the expert on this subject, would be glad to explain that to you. Mr. HEMPIIILL. Senator, we are now conducting an experiment with four distributors, putting in about 400 water heaters, 50 air-condition- ers and 50 heat pumps, which will cycle on and off by remote control. That experiment will work by what's called two-way radio control. That is, during times of peak load, which is when we need the extra capacity the most, we'll cycle those machines on and off by radio signals to small receivers which are located in the homes in the machines themselves. We'll probably cycle the air-conditioners on and off every 7 minutes so that they're never cut off for a very long period of time. They still would maintain about the same degree of cool- ness in the house, but we would save roughly half the power require- ment. The water heaters we'll cycle on and off for differing lengths of time depending upon the storage capacity of each water heater. If you have a 120-gallon water heater you may be able to cycle it off for as long as 6 hours; if it's a 40-gallon water heater, you probably don't want to go much more than 45 minutes or an hour. One of the thing~ we're not sure about is precisely what period of time yoa can cycle these things on and off and not seriously interfere with the normal process of a residential consumer, of washing clothes, cook- ing, and things of that nature. And that's one of the things we have to find out. We're not precisely sure about that. PROGRAM TO BE VOLUNTARY Senator SASSER. Well, it occurs to me that some homeowners might resent such control of their appliances by a utility. How are you go- ing to cope with that? Mr. HEMPHILL. The program which we are engaged in is an experi- ment Participation in the program is entirely voluntary and there s a hold harmless provision in terms of rate impacts for the consumers. One of the things we want to test is, how, in fact, behaviorally, do peo- ple react to this in a behavioral sense. There are certain overtones that you correctly identified. Obviously, if we get substantial negative PAGENO="0085" 81 reaction it would not be a program which we would recommend im- plementing any further. Mr. FREEMAN. Could I comment on that, Senator? I share your concern about the "big brother" overtones of these load management devices and as far as the TVA board is concerned, we are not consid- ering any program of that kind unless it is completely voluntary. But we do think there are such cost-saving opportunities involved that the use of the devices needs to be explored. Consumers may voluntar- ily want to have their power interrupted at certain times in exchange for a discount that may very well turn out to be attractive, but I would not dream of imposing such a system on anyone unilaterally. INFLATION'S IMPACT ON BORROWING AUTHORITY Senator SASSER. Mr. Freeman, we were talking earlier about in.fla- tion. What is TVA.'s projection for inflation between now and 1986, and how are you taking this into account in your planning? Mr. FREEMAN. I believe Mr. Maxwell and Mr. Cross made detailed studies of our projections. Perhaps they ought to give you the pre- cisc number they used. Mr. CROSS. We're projecting capital cost increases in these studies of approximately 8 percent per year. Senator SASSER. And this is through 1986? Mr. CROSS. Yes; it extends through 1986. Senator SASSER. Now what amount. of the $15 billion additional borrowing authority can be attributed to inflation? In other words, what are you asking for as far as a real increase in borrowing author- ity-what are you requesting as far as real increase in current dollars is concerned? Is there inflation figured in the $15 billion request? Mr. FREEMAN. Yes; inflation is figured in it. Your question is, if we were able to freeze the value of the dollar today, how much money would we be needing? Senator SASSER. That's right. Mr. FREEMAN. Do you have that number? Mr. Cuoss. We don't have that number but it relates very closely to Mr. Freeman's earlier testimony, as far as inflation effects, that the $15 billion that we are requesting today, in terms of today's dollar, is significantly less than it would have been in 1976. Mr. FREEMAN. The number is roughly around $10 billion; one-third of it is due to inflation. Senator SASSER. Well, Mr. Freeman, I want to express my apprecia- tion to you and your colleagues for appearing here toda.y. We have additional questions which we would like to submit for the record and would request that you make your usual prompt and speedy response to.' I'd like to express my appreciation also, to Director Richard Free- man for his appearance here today. I understand he's convalescing from a recent operation and he looks hale and hardy. But thank you for being here. Mr. FREEMAN. Tha.nk you, Senator. Glad to have a chance to appear before you. Senator SASSER. Our next witness is Mr. George Usry, representing the Tennessee Valley Public Power Association. Mr. Usry is the chair- 1Seep. 105. PAGENO="0086" 82 man of the Committee on Power Supply and general manager of the Athens, Tenn., utility board. Mr. TJsry, we're delighted to see you today and if you'd be kind enough to introduce your colleagues there,. I think I know all of them, but we might hear from them for the record STATEMENT OP GEORGE H USRY, GENERAL MANAGER, ATHENS, TENNESSEE UTILITIES BOARD, AND CHAIRMAN OP THE POWER SUPPLY COMMITTEE OP THE TENNESSEE VALLEY PUBLIC POWER. ASSOCIATION, ACCOMPANIED BY JOHN COLLIER, BOARD MEN-- BER, CAINEY PORK CO-OP; HUGH MILRAINEY, GENERAL MAN-- AGER, CAINEY PORK CO-OP; AND JERRY CAMPBELL, EXECUTIVE DIRECTOR, TENNESSEE VALLEY PUBLIC POWER ASSOCIATION Mr USRY We appreciate the opportunity to testify today at this hearing because of the vital issue to our distributors of power. On my left here we have Mr. John Collier; he is a board memberS from the Cainey Fork Co-op; Mr. Hugh Milrainey is the general man-- ager of the co-op; and on my right is Jerry Campbell, he's the execu- tive director of the Tennessee Valley Public Power Association. PARTNERSHIP BETWEEN TVA AND NONPROFIT ELECTRIC POWER SYSTEMS We do not want to take up a lengthy period here to testify at this: hearing we ]ust want to put in the i ecoi d our interest is in the Ten- ne~see Valley Authority s debt ceiling iequest that is before Congiess at this time. To give you a little background, and the others a background into this hearing, the role of the 160 power distributors in the valley is one of longstanding partnership that goes back four decades. TVA being a Federal corporation and us the distributors being locally owned and locally managed electric distribution systems form this partner- ship. This has been, for the length of TVA's service in the valley, a "division of labor." We serve the customers and TVA provides the~ power that we use. The 110 municipal distributors and 50 rural elec- tric cooperatives are governed by boards of directors and are ap- pointed on a local basis and represent more than 1,000 board members. Nowhere else in the Nation is there such a partnership of nonprofit electric power systems-a Federal agency generating and transmit- ting the electricity, and the nonprofit municipal and rural cooperatives distributing the power at retail to more than 8 million users. TVA acts under the act of CongTess passed in 1933, several times amended. The local power systems-municipal and rural cooperative utilities-are authorized under State law, and we have contracts with. TVA for the purchase of the electric power at wholesale. These 160 municipal and rural electric cooperatives represent siz- able operations, with combined annual revenues of more than $1.5 billion, and assets of more than $2 billion. They are located in parts of seven States; Alabama, Georgia, Ken- tucky, Mississippi, North Carolina, Tennessee, and Virgima. These also include the major cities in Tennessee, Alabama and other States.. PAGENO="0087" 83 TVA'S IMPACT ON REGIONAL ECONOMY We have good reason why that TVA's future power supply is of overwhelming importance to the local electric power systems rep. resented by the Tennessee Valley Public Power Association. First of all, TVA is the sole power supplier to these 8 million people. We are totally dependent on their ability to supply that power. These 160 locally owned power distribution systems last year paid TVA more than $11/4 billion for electricity. That's nearly two-thirds of TVA's total income. We, as distributors of the cost of wholesale power that we collect from our customers pay 80 cents on every dollar to TVA for that cost of power. The locally owned power distribution systems are vitally affected by TVA's policy decisions-especially those that impact on the cost of electric service, and on adequate supply. Paying rising rates is highly undesirable; not having enough electrical energy to keep the lights on would be much worse. Because of the division of repsonsibility between TVA and the local power distribution systems, it is the 160 municipal and rural coopera- tive electric systems that deal directly with the electric consumer. When TVA modifies the wholesale rate schedules, it is the local dis- tributor who must pass that rate change on along to the retail con- sumers in their local communities. When TVA issues bonds or notes for expanding electric generation and transmission, it is the power revenues from the local power distributors' retail customers that represent the primary support for those bonds. If TVA does not have enough generating capacity to supply all of the region's power needs, it is the local distribution systems that must curtail service to the customers. Thus, TVA policies concerning electric power must be implemented by 160 municipal and rural cooperatives throughout the States. In summary, these 160 locally owned, nonproft electric distribution systems-operated in parts of 7 States by municipals and rural coop- erative utilities-are totally dependent on TVA for their wholesale power supply, and are by far the largest purchasers of power, supply- ing nearly two-thirds of the TVA income. ADEQUATE ELECTRICITY ESSENTIAL TO REGION~S ECONOMY Adequate power is essential to the region's future. Our position con- cerning the adequacy of TVA's future power supply is simple and straightforward: we want the people of the Tennessee Valley to have enough electric power so the lights go on when they flip the switch. Our job, as consumer-owned electric utilities, is to keep the lights on, and to provide modern electric service to our communities. We have long-term contracts with TVA for the kilowatts of power to keep the lights on in our cities, towns, and rural areas. We expect TVA to honor those contracts by having enough power, day after day, month after month, so we, the local distributors, can keep the lights on. We request the Members of the Congress from the Tennessee Valley to serve as leaders in encouraging prompt passage of legislation to increase TVA's borrowing authority from $15 billion to $30 billion. as requested by the administration. We urge the valley Senators and. PAGENO="0088" 84 Representatives to serve as missionaries in explaining to the rest of the Nation the urgent need for adequate power supply in this region, so the area can continue to grow and not suffer economic stagnation. We do not appear here today as experts on load forecasting for elec- tric utilities. Experts can differ, as evidenced by the testimony that's already been presented here today. Our conclusion is not complicated It is that if we are to err in forecasting future electrical loads, we should err on the side of having enough power, so the lights and heat will stay on in the homes, so business and industry can grow and expand, providing more jobs for the region, so the valley can meet the promise of an expanding econ- omy at a faster rate than the national average. FUTURE POWER SUPPLY The Electric Power Research Institute, in an important study last year, reached this conclusion about planning for future power supply, and I quote: Specifically, the rate-paying consumer is better off if the utility guesses too high an expansion rate than too low. It is mainly due to the customer outage costs. Rene Males, a division director of the Electric Power Research Insti- tute, said in a speech last year: The project clearly indicates that electric systems should have more reserve capacity than indicated by traditional system planning analyses. This stems from including demand uncertainty and outage costs in the planning decision. At a time when utilities are having a difficult time licensing, building, and paying for new capacity, additional capacity requirements are hardly a blessing. How- ever, the consumer is depending on us to provide an adequate, reliable supply of electric energy today, as well as a decade from now. Moreover, the rate-payer expects utilities to build a system that minimizes the customer's costs. The message of this study by the respected Electric Power Research Institute is clear the consumer and the community, are better off if load estimates are too high than too low. ELECTRICITY SHORTAGE MORE COSTLY THAN OVER-ABUNDANCE A related message is that while it costs money to build new power- plants-especially in today's climate of rising costs and costly delays, there is a potentially greater cost to the consumer and to society: run- ning out of power. It costs more to run short of power than to have an abundance of power. Because if there isn't enough power, lifestyles change, jobs are cutback, standards of living reduced, and society * slowed. POWER FOR FUTURE REQUIRES PLANNING TODAY The only time to plan for enough power for 1990 is today. If we wait any longer, there will likely not be sufficient time to brinff new needed power facilities on line. So now is the time to extend TVA's borrowing authority. Tennessee Valley Public Power Association- whose member utilities provide electricity to more than the 8 million people in the States-urges this committee and the Congress to pass le~nsl'ution quickly to give the Valley the assurance of new jobs and a using standaid of living Thank you. PAGENO="0089" 85 Senator SASSER. Thank you, George. [Statement of Mr. TJsry follows:] PREPARED STATEMENT OF GEORGE H~ USRY, GENERAL MANAGER, ATHENS, TENNESSEE UTILITIES BOARD, AND CHAIRMAN OF THE POWER SUPPLY COMMITTEE OF THE TENNESSEE VALLEY PUBLIC POWER ASSOCIATION name is George H. Usry. I am general manager of the Athens, Penn., Utilities Board, a municipally owned electric utility serving about 10,000 electric meters. In addition, I am also chairman of the Power Supply Committee of the Tennessee Valley Public Power Association, a regional association of the i6~ municipal and rural cooperative electric systems that purchase their entire wholesale power supply from the Tennessee Valley Authority (TVA). We understand that this hearing relates primarily to the need for future elec- tric power supply for the Tennessee Valley. The consumer-owned electric dis- tribution systems in the Tennessee Valley are deeply concerned about future electric power supply, and strongly in favor of adequate supply to meet the grow- ing needs of the region. BACKGROUND INFORMATION Let me provide brief background information on the role of the 160 locally owned electric power distribution systems represented by the Tennessee Valley Public Power Association. In the Tennessee Valley, for more than four decades electric power has been the product of a partnership between the Tennessee Valley Authority (TVA)- a regional Federal corporation-and locally owned, locally managed electric distribution systems. Ever since TVA was created in 1933, there has been a "division of labor," with TVA responsible for generating and transmitting the electric power via a regional transmission network; and with the local delivery of that electricity to the ultimate consumer-the homes, farms, businesses, and industries-in the hands of consumer-owned electric utility systems: 110 mmii- cipal electric systems and 50 rural electric cooperatives. Nowhere else in the Nation is there such a partnership of nonprofit electric power systems-n Federal agency generating and transmitting the electricity, and nonprofit municipal and rural cooperative electric systems distributing the power at retail to more than S million users. TVA acts under an act of Congress passed in 1933, and several times amended. The local power systems-municipal and rural cooperative utilities-nrc author- ized under State law, and have contracts with TVA for the purchase of electric power at wholesale. These 160 municipal and rural cooperative eletcric systems represent sizeable operations, with combined annual revenues of more than $1.5 billion, and assets of more than $2 billion. They are located in parts of seven States, including Alabama, Georgia, Ken- tucky, Mississippi, North Carolina, Tennessee, and Virginia. They include major Tennessee cities such as Chattanooga, Knoxville, Memphis, and Nashville. THE DISTRIBUTORS' STAKE IN ADEQUATE ELECTRIC POWER SUPPLY Here are reasons why TVA's future power supply is of overwhelming un- portance to the local electric power systems represented by the Tennessee Valley Public Power Association. (a) TVA is the sole wholesale supplier of electricity to those 160 municipal and rural cooperative electric systems, which provide electric power a~t retail to more than S million people in parts of seven States. These locally owned electric distribution systems, then, are at present totally dependent on TVA for their wholesale power service. (b) These 160 locally owned power distribution systems last year paid TVA more than $1~/4 billion for electricity-Or nearly two-thirds of TVA's total income from the sale of electricity. These local power systems are, by far, tile largest purchaser of TVA electric power. These local utilijties-Hand their retail cus- tomers, who pick up the bill ultimately-are directly affected by TVA's policy decisions. Tile municipal and rural cooperative electric systems in the Tennessee Valley pay TVA nearly four ti:mes as much money for electricity as do TVA.'s Federal agency customers, and about 3% times as much as TVA's directly served in- - dustrial customers. PAGENO="0090" 86 (c) The cost of wholesale power from TVA makes up about 80 percent of the total cost of supplying electric power at retail to the Valley's power users. To iestate this fact, about 80 cents of every $1 of expenses incurred by the Valley's 160 municipal and rural electric systems goes for buying power at wholesale from TVA. These locally owned power distribution systems are vitally affected by TVA policy decisions-especially those that impact on the cost of electric service, and on the adequacy of supply. Paying rising rates is higthly undesirable; not having enough electrical energy to keep the lights on would be worse. (d) Because of the division of responsibility between TVA and the local power distribution systems, it is the 160 municipal and rural cooperative electric systems that deal directly with the electric consumers. When TVA modifies its wholesale rate schedules, it l5 the local distributors who must pass that rate change along to the retail consumers in their local communities. When TVA issues bonds or notes to expand its electric generation and transmission system, it is the power revenues from the local power distributors' retail customers that represent the primary support of those bonds If TVA does not have enough generating ca pacity to supply all of the region's power needs, it is the local distribution systems that must curtail electric service to consumers. Thus, TVA policies concerning electric power must be implemented by the 160 municipal and rural cooperative electric systems. To summarize, then: These 160 locally owned, nonprofit electric distribution systems-operated in parts of seven States by municipalities and rural cooperative utilities-are to- tally dependent on TVA for their wholesale power supply; are by far the largest purchaser of TVA power, supplying nearly two-thirds of TVA's total income from the sale of electricity; spend on TVA power supply about 80 cents out of every $1 of their total expenses in operating their locally owned electric systems; and are the means by which TVA power policies are implemented, in day-to-day contact with retail electric consumers. ADEQUATE ELECTRIC POWER IS ESSENTIAL TO THE REGION'S FUTURE Our position concerning the adequacy of TVA's future power supply is simple and straightforward: we want the people of the Tennessee Valley to have enough electric power so the lights go on when they flip a switch. Our job-as consumer- owned electric utilities-is to keep the lights on, and to provide modern electric service~ to our communities. We have long-term contracts with TVA for the kilo- watts of power to keep the lights on in our cities, towns, and rural areas. We expect PVA to honor those contracts by having enough power, day after day, month after month, so we, the local distributors, can keep the lights on. We expect the Members of the Congress from the Tennessee Valley to serve as leaders in encouraging prompt passage of legislation to increase PVA's bor- rowing authority from $15 billion to $30 billion, as requested by the administra- tion. And we urge the Valley Senators and Representatives to serve as mission- a ries in explaining to the rest of the Nation the urgent need for adequate power supply in this region, so the area can continue to grow and not suffer economic stagnation. I do not appear here today as an expert on load forecasting for electric utilities. Experts can differ, as evidenced by the old saw that if all the world's economists were laid end to end, they would no treach a conclusion. Our conclusion is not complicated. It is that if we are to err in forecasting future electrical loads, we should err on the side of having enough power-so the lights and heat will stay on in homes; so businesses and industry can grow and expand, providing more jobs for the people of the region; so the Valley can meet the promise of an economy expanding at a faster rate than the national average. In 1958-21 years ago-the municipal and rural cooperative distributors of TVA power served 1.5 million customers, and distributed 17.5 million kilowatt- hours of electricity. In the past year the distributors served about 2.6 million customers (meters)-an increase of well over 1 million meters. And total kilo- watt-hour sales of the distributors amounted to more than 70 billion kilowatt- hours-more than four times as much electricity as used 21 years ago. Another 21 years will take us to the year 2000. By that time this Vafl~y will likely need the electricity to serve at least another 1 million homes, farms, busi- nesses, and industries. And the use of electricity will undoubtedly continue to PAGENO="0091" 87 grow in our complex, automated society. To plan otherwise is foolhardy and shortsighted. The Electric Power Research Institute, in an important study last year, * reached this conclusion about planning for future power supply: "Specifically, the ratepayin'g consumer is better off if the utility guesses on too high an expansion rate than too low. This is mainly due to the customer outage costs." Rene Males, a division director for the Electric Power Research Institute, said hi a speech last year: "The project clearly indicates that electric systems should have more reserve capacity than indicated by traditional system pianning.analyses. This stems from including demand uncertainty and outage costs in the planning decision. At a time when utilities are having a difficult time licensing, building, and paying for new capacity, additional capacity requirements are hardly a blessing. However, the consumer is depending on us to provide an adequate and reliable supply of electric energy today, as well as a decade from now. Moreover, the ratepayer expects utilities to build a system that minimizes the customer's costs." The message from this study by the respected Elecric Power Research Institute is clear: the consumer-and the community-are "better off" if load estimates are too high `than too `low. A related message is that while it costs money to build new powerplants- especially in today's climate of rising costs and costly delays-there is a poten- tially greater cost to the consumer and to the society: running out of power. It costs more to run short `of power than to have an abundance of power. Because if * there isn't enough power, lifestyles change, jobs are cut biack, standards of living reduced, society slowed. The only time to plan enough power for 1990 is today. If we wait longer, t'here will likely not be sufficient time to bring new, needed power generating facilities on the line. So now is the time to extend TVA's borrowing authority. The Ten- `nessee Valley Public Power Association-whose `member utilities provide elec- trici'ty to more th'an 8 million peo'p'l'e in parts of seven States-urges this com- mittee and the Congress to pass legislation quickly to give the Valley `the assur- :arice of new jobs and a rising standard of living. As a manager of a municipal electric utility, my job is to keep the lights on in my community. I am confident that members of this Committee want to keep the lights out, too. If TVA's borrowing authority is not extended in a timely fashion, and there is not enough electricity to power the `Tennessee Valley, no responsible official wants to be identified as the person who turned the lights off. Some persons today who do not favor additional borrowing authority for TVA are not in positions of responsibility, and if the lights go out a decade from now, those critics will not he held responsible. The job of keeping the lights on is that of responsible legislators, Federal offici~la, and local utility managers. We look to `a responsible age~cy, TVA, to make the power load forecasts for which it will still `be responsible by the year 2000. We look `to fbi's committee for the action that will expedite additional borrowing `authority to enable TVA to meet this Valley's growing power need's. Senator SASSER, George, do your distinguished colleagues there, Mr. Milrainey or Mr. Collier, wish to make any statement ~ Mr. MILRAINEY. I don't think so, Senator. I, personally, am glad to be here to see you again. STATEMENT OF HUGH MILRAINEY, GENERAL MANAGER, CAINEY FORK CO-OP IMPACT OF UNDERESTIMATING FUTURE POWER REQUIREMENTS George's statement very clearly, I think states the position of the `Tennessee Valley Public Power Association, of which I am a vice-presi- dent. I think we're very concerned about the power supply; I think we support the TVA position very firmly. We know that projecting * the future is very difficult but we are toying around with something * that is very important to the lives of our people. I recall-you may be PAGENO="0092" 88 mindful of, a few years back when the coal strike, when it looked likeS we'd have a shortage of power, a lot of chaos in the communities, in. the industrial communities and whatnot. I think this really bears up our fear of the future if we do underestimate the needs. And again, I thank you and I enjoy seeing you. Senator SASSER. Mr. Collier, you wish to make a statement? STATEMENT OP ~1OHN COLLIER, BOARD MEMBER, CAINE! PORE CO-Op IN-DEPTH STUDIES NEEDED FOR PROVIDING FUTURE POWER NEEDS Senator Sasser, it's an honor to be here. I didn't plan to be here,. but I'm here. It's real interesting. I'm a consumer, as well as setting up policy as a. director in a co-op. Our interest is a sufficient supply of energy at the lowest cost. I think we're all in a glass bowl; I think the Free-~ mans are, you are, and everybody else in a management position is. It seems like it took a short time in this position, but I do think the TVA Board should be as economical as possible in their cost overruns. I do think that the public, the consumers-since TVA is the only dis- tributor of power in this area-do expect them to provide sufficient energy to turn the lights on, as George said, and to provide us with. the luxuries. I can remember back 40 years ago, and it's a different situation than it was 10 years ago, and I don't think anybody could. look very far into the future to see what it's going to be in the next. 10 or 20 years. And anybody who has kept up with the papers and television knows that not only this country, but all the countries are in quite a bit of turmoil. And I think that the lawmakers and the TVA Board, should do in-depth studies of providing this area with the proper power to provide the necessities, what have become the necessities of the South. Thank you, Senator. Senator SASSER. Thank you, Mr. Collier, and Mr. Usry and Mr.. Milrainey. Thank you for appearing here today and your remarks, of course, will be incorporated fully in the record. Thank you very much. The next witness is Mr. Charles H. Wilson of the Tennessee Valley Energy Coalition. Mr. Wilson. I presume you're here to testify in favor of this $15 billion, Mr.. Wilson. Mr. WILSON. Your presumption is not well taken, Senator. Senator SA.SSER. Well, it will be interesting to hear another view.. Mr. WILSON. I'd like to introduce on my left, Miss Louise Gonfree Gonslow and on my right, Reverend Bill ~I'roy, who are colleagues of mine. Before I start, I'd like to say, we would have had a lot more people here, the residential group, if they'd had enough money to buy gaso- line and pay their parking bill, after paying their electric bill this. month. So that's ~ne reason why we didn't have any more people here representing our group as far as those that really bites the difference~ PAGENO="0093" 89 STATEMENT OP CHARLES H. WILSON, TENNESSEE VALLEY EN- ERGY COALITION AND THE NATIONAL COUNCIL OP SENIOR CITI~ ZENS, ACCOMPANIED BY LOUISE GONPREE GONSLOW AND REV. BILL TROY Mr. WILSON. My name is Charles Wilson and I `am here today rep- resenting the Tennessee Valley Energy Coalition, and the National Council of Senior Citizens, which is a member of that coalition. The Tennessee Valley Energy Coalition is a newly formed organization comprised of many various constituencies in the Valley; senior citi- zens, church, women, Appalachians, environmentalists, people on low `and fixed incomes, rural and community groups. All of these in- ~terests have gathered together to respond in unison to the many rate issues which affect our security and well-being. The ratepayers of the Tennessee Valley will bear the brunt of any decision made about TVA's debt ceiling, and thus should have every legitimate right to be heard during these discussions on that decision. We thank you, Senator Sasser, and the other committee members for recognizing that reality and permitting citizens' testimony during these hearings. RATIO OF INCOME TO UTILITY COSTS In 1975 TVA went to Congress to increase its debt from $5 billion to $15 billion. Today 22 percent of our electric bills pay for the $650 million interest payment TVA must pay on the $7 billion it ha's already spent for its nuclear power construction program. Already a great number of our people on fixed and low incomes spend two- thirds of their monthly income for electric bills. For most retired people, utility bills range from 10 to 70 percent of their monthly income. TVA FINANCIAL CONDITION DETERIORATING By 1981 the ratepayers will be paying over $1 billion to meet the interest costs on the $15 billion TVA will have spent on its power construction program. These interest payments do not even touch cost on the debt retirement. The $1 billion interest `charge is roughly two- thirds of the original cost of all the dams and reservoirs built by the agency since 1933. TVA's financial condition is deteriorating quickly as the utility plunges ever deeper into debt. TVA is urging Congress to raise its debt ceiling to $30 billion. It claims it needs the fund's to complete the 14 nuclear power units cur- rently under construction, plants which have already incurred 100 to 200 percent cost overruns. TVA claims it needs additional capacity even though the recent GAO report concludes that TVA will not need additional capacity through the end of the century. Senator SA55ER. Mr. Wilson, you state that-if I may interrupt you just a moment. You state it claims it needs the funds to complete 14 nuclear power units currently under construction. Is that a misprint or do you mean to say 14 there ~ Mr. WILSON. I couldn't hear you. PAGENO="0094" 90 Senator SASSER. I say, you say, in the second paragraph of your statement, second sentence, beginning, "It claims it needs the funds to complete 14 nuclear power units currently under construction." Do~ you mean to say 14 there or is that a misprint? I think there's six- Miss GONSLOW. There, are 14 units. Reverend TROT. At six sites. Mr WILSON Six sites Senator SAssrR Oh, OK, I get you now The difference between the units and the sites Right, OK Excuse me REVERSE TREND OF INCREASED ELEOTRIFICATION Mr. WILSON. The Tennessee Valley is already the most highly elec~ trifled region in the United States, and, thus the world. Increased elec- trification means automation and loss of jobs, a fact many unions are beginning to recognize. TVA has a moral responsibility to the citizens.. of the valley to reverse this trend toward increased electrification; however, TVA, pretends that the situation is out of their control andl that it can only meet the demand. By building ever more capacity, is TVA meeting demand or is it' creating it? How does TVA fit into the plans of a national grid? Wi1IT TVA be the supplier of power that is cheaper because of its ability- to get low interest Federal' loans? More and more ratepayers are com-~ ing to the realization that the Tennessee Valley is being turned into an': energy colony for the benefit of other utilities, while we, the ratepayers, must pay for the costs of construction and interest and bear the envi-- ronmental burdens associated with coal and nuclear generation. TVA ratepayers are being forced by TVA to subsidize other utilities when TVA becomes an exporter of power. Already, both Freemans have ad- `mitted that when all the nuclear plants are on line, TVA will have such an excess of generating capacity that it will be able to sell power~ to other utilities. HISTORIC COMMITMENT TO WELFARE OF VALLEY CITIZENS Ratepayers have not been privy to any of these TVA decisions andT so our opinion on these matters has not been heard by TVA nor will TVA probably ever ask for it. Let us state for the record right now, that TVA was established as a regional entity to develop the resources- of the Tennessee Valley. TVA must be encouraged to remember its. historic commitment to the welfare of the valley citizens. We oppose its recent trend toward considering itself an agency with primarily a national responsibility. Such an orientation is new to TVA and very'- dangerous and expensive for its ratepayers. ALTERNATIVE METHODS TO DECREASE ELECTRICITY CONSUMPTION Conservation, solar energy, load management, rate restructure are all options which TVA could utilize to decrease current needs for'~ power consumption Indeed, if TVA was sincerely mterested in the interests of the valley and in demonstrating to the Nation that society can free itself from ever larger energy fixes, such options would become~* central to TVA planning. The power needs of the valley could be met through alternative means which might even make it unnecessary to~- PAGENO="0095" 91 complete the Yellow Creek, Phipps Bend, and perhaps even Harts-~ yule. Tue Tellico saga taught us a lesson; we don't have to complete an idea if it's not well thought through to begin with. Such a course of action would save the ratepayers billions of dollars and end the neces- sity of raising TVA's debt ceiling. MORE CITIZEN PARTICIPATION IN PLANNING PROCESS However, such are not T'VA's current goals, whatever they are. That, by the way, is `a great problem for us citizens. TVA says it always has these plans and studies, but these documents are never released to the public to permit our study and educated response until just before they are implemented. The TVA seems afraid to involve citizens in such vital `decisions as power construction plans. It an- nounces its plans and expects the ratepayers to' pay. The coalition urges Congress to encourage TVA to open itself to citizen participa- tion in its planning processes so that people it so drastically affects have the guaranteed opportunity to have our opinions heard and considered before decisions are made. We don't need to remind this committee that TVA is a self-regulating agency with no other watch- dog agency other than Congress itself. It is perhaps time to extend democracy to the valley, Tennessee Valley, and change that cumber- some and unrepresented mechanism. INCREASED DEBT CEILING AN INVITATION TO BANKRUPTCY The `TVA was established as a yardstick so that other regions of the country and other utilities could learn from the `TVA model. Are we to gather from these events that the model being proposed for the country is that, ever-increasing debt is th'e way to go TVA has not been fiscally responsible. Now it wants the debt ceiling raised to $30 billion. Such deficit spending breeds inflation. Moreover, the increase of the debt ceiling will bring TVA that much closer to `default, a circumstance that will place the entire debt into the hands of the Federal Government. TVA has already admitted that with the completion of all of its nuclear units, it will have more power than it needs. `The GAO report contends that `TVA doesn't need additional capacity until the end of the century. TVA h'as only begun to experiment with conservation, solar energy, and load management which will decrease the demand for existing capacity. FUTURE TVA ROLE We urge this committee to decide that the TVA debt ceiling not be raised any further and that it suggest to TVA it co'nsider delay of Yellow Creek, Phipps Bend, and Hartsville. It ought to better man- age its fiscal resources. Further, we urge this committee to encourage TVA to integrate conservation, solar energy, load management, and rate restructure into its power projections and to demonstrate to the Nation, in its role as a yardstick, how these options can reduce the need for electricity. Finally, TVA's regional nature must be reaffirmed to discourage current trends toward satisfying national energy needs. We here in the valley consider TVA a great potential asset once it PAGENO="0096" 92 has become responsive to. the needs of the valley rather than to its own. internal whims or grandiose aspirations. We need TVA to meet our demands here in the valley. TVA has a moral responsibility to respond to our needs. We need your help to remind TVA of that. We urge you to listen `to us. Thank you. NEED FOR ADDITIONAL GENERATING CAPACITY QuESTIONABLE Senator SASSER. Thank you very much, Mr. Wilson. You had a couple of points in your statement here-TVA has mdi c'ited that it doesn't need and will not need additional generating ca- pacity when the nuclear plants are completed and you indicate, I think, both Chairman David Freeman and Richard Freeman have also been quoted as having said this. Can you give us case and verse on that and elaborate on that statement a little bit? Ms. GONSLOW. Well, there are several statements-I can give you press clippings; send them to you; in which both of the Freemans stated that once all the nuclear plants are on line there will be addi- tional capacity enabling us to sell power out of the region. They have not said that since they have asked for the debt ceiling to be raised SUBSIDIZING POWER NEEDS OF OTHER SECTIONS OF NATION Senator SASSER. Well, as you know, for many years TVA has had in- terchange agreements with other utilities to `buy and sell power and I really don't have any quarrel with that. But I think like you, and I think like most other citizens of the valley, I would be opposed to just willy-nilly selling power as a matter of course to other parts of the country. I don't think that we should have to subsidize other areas for power, and I don't think we should be using our area down here to put electricity on a wire and send it to some place else in the country on a routine basis That's not what TVA is all about Reverend TROT. Senator, can I just make a remark here? Senator SASSER. Yes, indeed. FUTURE SUPPLY CAPABILITIES OF TVA Reverend TROY. As you know, other utilities, particularly with re- gard to nuclear generation, are holding back on expanding and some of those utilities are within range of buying TVA power. I think Mr. Freeman said today, that the bottom line is that TVA can a nuclear powerplant for 25-percent less money than anybody else can. That's still quite a bit of money as evidenced by the fact that they want to double that debt ceiling in one full swoop It just raises the question in your mind-and I think that tha~t's one of the various strong points that we want to make with you today-that while they have not said they intend to supply power or to be a power supplier for other areas of `the country, that if the debt ceiling is raised as they wish, the numbers make it look as though they will be in a position to do that. And if over- sight is not exercised by the Congress as it will be if otir coalition has anything to say about it via local citizens in the Tennessee Valleys t'hen the capacity is there to do that whether or not anybody intends for it to happen or will say that they intend for it to happen. The question is, why should we be able to afford it if other people can't? PAGENO="0097" 93 TVA GROWTH PROJECTIONS NEED MORE STUDY Ms. GONSLOW. And on the subject of TVA projections, the variables that they use in the cranking out what they would need, do not in- clude restructuring, the effects of restructuring upon the rates. It assumes that there's going to be approximately less than 1 percent of solar energy by 1990 to reduce the load and does not deal with the issues of load management. So their projections are still high because they don't consider all the possible conservation practices that they could implement, and I think there really needs to be more study, at least, on this whole issue of how much power TVA n&eds to supply the valley. I think there needs to be a great deal more public education on this issue and public input since the ratepayers are the ones who are going to bear the brunt of it. And I agree right now that Congress makes decisions but it's the citizens who bear the responsibility of that decision and I urge that we don't rush this through because it's not a decision that will disappear overnight-we're going to have to live with it here. EFFECT OP RATE INCREASES ON REGION Mr. WILSON. Senator, I'd like to say one thing, that maybe most of the people in this room today can pay their utility bill, but there's thousands of people out there who can't pay such utility bills with this interest that TVA's going to add on, plus the increase in opera- tion costs that they're going to add on. We urge that people think about the ratepayers. Ms. GoNsLow. People who receive $280 a month for income, are pay- ing $200 utility bills. Senator SASSER. Well, maybe we struck a blow for liberty today, Mr. Wilson, because these hearings were held on a day when I think the Board was going to meet to consider a rate increase and they had to postpone that because of this particular hearing. Ms. GONSLOW. Until tomorrow. Senator SASSER. Maybe we were some assistance- Mr. WILSON. They just hired an adviser, going to pay him $48,000 a year. Advise them for what? Don't they have no heads on their own shoulders to run this business? Senator SASSER. Thank you very much for appearing here today and giving us the benefit of your views. Mr. WILSON. Thank you. Senator SASSER. The next witness is Mr. John Thomas from the East Tennessee Energy Group. Mr. THOMAS. With me is Bob Allen, also of the East Tennessee En- ergy Group. Senator SASSER. I didn't catch the name. EXCESS OP ELECTRICITY INCREASES GROWTH RATE OF VALLEY Mr. THOMAS. Bob Allen. In response to the question you asked the previous people, David Freeman made a statement in Johnson City, I think in October or No- 45-720-79------T PAGENO="0098" 94 vember of last year:which stated ineffect that there would be growth in the. valley for the simple reason that there would be an excess of elec- tricity and that he could not be accused of being a no-growth advocate, he had no control over it. It was issued in a press release by TVA or a copy of that speech was sent out by TVA in October or November last year Mr ALLLN There was also a press release, if I might add, in I be heve it was Saturday's News Sentinel here, talking about the trans mission lines being built from the Phipps Bend nuclear powerplant to supply the private utility of Kingsport, Tenn~, and aiso~-I forget the n'tme of it, but the private power company in southwestern Vir- ginia. Mr. THOMAS. Appalachian. Mr. ALLEN. Appalachian Power. STATEMENT OP JOHN Z. C. THOMAS, EAST TENNESSEE ENERGY GItOUZ ACCOMPANIED BY BOB ALLEN, EAST TENNESSEE ERGY GROUP VOICE. OF CITIZENS IGNORED BY TVA DECISIONMAXING PROCESS Mr. THOMAS. I'm John Thomas from the East Tennessee Energy Group. We thank you for opening up this hearing to citizen participa- tion and for this opportunity to testify before the subcommittee. The voice of citizens is too frequently ignored in the Tennessee Valley Au- thority's decisionmakrng process The SO called public meetmgs on the fuel adjustment clause or the rate reviews are merely comment pe- riods on decisions already taken, and thus because they are so mean- ingless they are poorly attended At the moment there is no mecha- nisin for broad citizen input to be incorporated in the decision on whether to increase TVA's debt limit ceiling. This hearing is the only chance citizens will have t.o have input on that decision. We appreci- ate this opportunity but it is not enough. That, however, is not your fault. You have listend today to much testimony on TVA's growth pro- jections. Unfortunately such projections are an inexact science, to say the least, and generally can be made to prove whatever you want to prove Although such projections are important in deciding whether to raise TVA's debt limit ceiling, there are other considerations that must be taken into account. IRRESPONSIBLE FINANCING In 1975, TVA approached the U.S. Congress and had its debt limit ceiling raised from $5 billion to $15 billi~n. In less than 4 years they have contracted to spend that money, and they are now asking you t.& further increase their borrowing power from $15 billion to $30 billion. To what end? That is a most important question since TVA has indi- cated no specific uses for the money except for a couple of bilhon dol lars necessary to finish their current construction commitments There have been hints that anOther nuclear facility is on the books and the General Accounting Office report mentions the possibility of at least. one more pump storage facility. The nuclear plant was in the budget PAGENO="0099" 95 for fiscal year 1978 but was omitted from the 1979 budget. Thus we are left with over $10 billion for which there is no explanation other than TVA's projected growth projections. This is irresponsible financing especially since TVA undoubtedly has some idea of what type of fu~ ture capacity they are planning. If they do not have such plans they. are even more irresponsible. ECONOMIC IMPACT OF NUCLEAR OPTION ON COAL COUNTRY TVA's last increase ~ `is to fulfill its commitment to nuclear power and we are fearful that, that is what the current request for additional borrowing authority will be used for. In this region, in this day and age, such a commitment goes against the best interest of the people for two reasons. This is coal country and to embrace a technology that has as its end result the retiring of coal-fired plants is not in the best interests of Appalachia's economy. By going nuclear and ignoring coal supplies TVA is doing incredible damage to the futuie job mar- ket in this area. That and that alone is sufficient grounds to reconsider financing ~J~\7~5 expensive nuclear option. Equally as important is the interest costs for TVA's nuclear com~ mitment. This increasingly is going to become a greater and greater burden on the valley's citizens, especially those on low or fixe.d in.- comes. In the rate review coming up, the interest expense for fiscal year 1979 is projected to be $655 million* as compared to approximately $487 million in 1978 and $384 million in fiscal year 1977. The projected interest expense for fiscal year 1979 is only slightly less than half of TVA's projected fuel expense. One would almost think they are literally burning money. Almost all of this increase can be attributed to TVA's nuclear construction program. By 1981 when TVA at the most will have on line three nuclear plants, the interest expense is expected to reach more than $1 billion annually. Before subjecting the Valley's ratepayers to this burden, careful consideration shoui4 be given to the need for increasing the debt limit ceiling. EXPORT OF ELECTRICITY There are persistent rumors that part of TVA's excess capacity, some of which will be built with the increased debt limit ceiling, will go for the export of electricity. We have been exporting energy for the last 20 years in the guise of enriched uranium, and we are tired of being an energy colony. Regardless of how you look at it, it costs us more than we get in return. It costs our environment, our jobs, and our lifestyle. Certainly any increase in the debt limit ceiling should be tied to a requirement that energy produced in the Valley will stay in th~ Valley. Before raising TVA's debt limit ceiling you should carefully review TVA's past practices, especially those for its nuclear program.. In light of the debate over TVA's current growth projections you con- sider the ones used to justify TVA's last three nuclear plants-given that those projections were a lOt less sophisticated than the ones; under review. PAGENO="0100" 96 REVIEW OF COST-BENEFIT ANALYSIS Furthermore the cost-benefit analysis for the nuclear plants should be reviewed to see if they are still viable. TVA is notorious for doing a poor job of projecting costs.. This is amply demonstrated in the cost overruns for TVA's nuclear facilities. For the Sequoyah plant it is now 227 percent; for Watts Bar it is 115 percent; for Bellefonte it is 100 percent; for Hartsville it is 122 percent: and for Browns Ferry, the only plant operating, it is 135 percent. TVA's last two plants have a current cost overrun of 13 percent each but then construction has barely started on Phipps Bend and Yellow Creek. Although a lot of this increase is due to inflation that is no excuse since TVA always claimed it had taken that into consideration in its cost-benefit analysis. As an aside, let me say that a lot of the above mentioned problems might not loom so large in the future since TVA is now under new leadership. Regardless of future plans to. correct the inequalities of the past, such previous mistakes should not be allowed to survive merely because the projects have been started. By getting the pro- jections and cost-benefit analysis to come out as they wished, the old TVA was able to get questionable projects authorized. YUBLIC PARTICIPATION IN TVA'S DECISIONMAKING PROCESS My final point deals with public participation in TVA's decision- making process-effective public participation. Before TVA's debt limit ceiling is raised there must be public education and hearings. TVA said in January that none were planned, that none were needed because they did not have any other option except to ask for the increase. There are other options, some of which have been pointed out today. And certainly before the debt is increased, those of us that are going to have to pay for it ought to know how much it is going to cost, and what it is going to be used for. And this time we want understandable figures and information that reflect what is going to happen, not what TVA wants to happen. After all, in the end we are the ones that are going to have to live with whatever results. This is our home and we cannot move away or retire and leave the mess for someone else to clean up. If TVA is as serious about its public participation program as their press releases say, then this is a good opportunity to educate the people of the Valley as to TVA's plans and problems. Then they could have meaningful public participation and a decision could be made by all the people of the Valley, not just a few. Maybe the increase is necessary but we have no evidence that it is except to be told so. That is not good enough. If TVA is not serious about citizen action, then the whole new character of the agency is a sham. In fact, the new TVA is beginning to look and sound like the old TVA in different clothes. Thank you. Senator SASSER. Gentlemen, thank you very much and we appreciate your participation today and getting your views. Mr. THOMAS. Thank you. Senator SASSER. Our next witness is Mr. Will Skelton, representing the Sierra Club. PAGENO="0101" 97 STATEMENT OP. WILL SKELTON, TENNESSEE CHAPTER, THE SIERRA CLUB Mr SKELTON Senator, as indicated, I'm Will Skelton, I appreciate the opportunity to be here. I'm appearing on behalf of the Tennessee chapter of the Sierra Club, which is a unit of the national Sierra Club. I want to try to be brief because I'd like for you to be able to enjoy some Of this beautiful Tennessee weather we're having, which is in sharp contrast, I understand, to Washington, today anyway. Senator SASSER. It is, indeed. CLEAN AIR SETTLEMENT Mr. SKELTON. First, before I get into the talk which I have given you all a copy of, as far as the clean air settlement, the Sierra Club ~vas a party to that lawsuit, I was chairperson of the Tennessee chapter at the time the settlement was approved and was coordinating with the lawyer for us as far as the approval, and based upon talking with him-I don't know the details-but based upon talking with him, we gave a lot too. It was not simply TVA giving; it was a fair settlement from both sides. And that's generally what I hear from everybody that's informed. It's a very complex issue, I'll have to say that, because~ I don't understand it, but the people who are in a position to know, our~ lawyer, staff for other Congressmen, Senators, that kind of thing,. people who are in a position to know feel it's a pretty fair settlement,,, so I don't think it's a settlement that brickbats should be thrown at unnecessarily. I do agree and support strongly, and we do, the Sierra Club, your oversight of TVA. David Freeman and Richard Freeman, they've done a lot in changing the attitude of TVA toward the people in the valley- there's no question about that-but there's still things to be done and there's still a need for you all to take a look at then, every now and then, and that's good. DEBT CEILING INCREASE TO EXERCISE NUCLEAR OPTION As far as the debt ceiling increase, TVA, of course, has long, as indi~ cated before, has been a yardstick utility for a long time. I feel one of the big reasons for that is the natural resources that we've had in the Tennessee Valley. Originally, TVA had water power. We had a lot of rivers and they dammed those and that was cheap electricity. Then when that ran out, when they dammed all the rivers, they turned to coal. Again, we had lots of coal, massive reserves of coal, enough to last 200 years or so, and we still have that coal, of course, but for some reason they got away from coal and started turning-we believe, un- fortunately-to nuclear in the last-less than 10 years. And they're turning not just slowly, it's not a slow turn, it's a complete about i~ace from one of coal reliance to nuclear reliance for generation. As indi-~ cated before, they are constructing six nuclear powerpi ants; they've got one already on line-when it's on line. The down time, of course, as you know, is pretty high on nuclear powerplants. And the nuclear program really is the primary reason for their wanting to borrow up to $30 million. I shouldn't confuse that because that's a lot of difference. PAGENO="0102" 98 1'he nuclear program and nothing else. It comes down to that. We feel that they are overemphasizingth~snudear option, that they're going to become a yard~tiek on the other side of the coin. They're going to be a yardstick on the high side if they don't watch out, rather than the low side. The reasons we feel this are outlined in the document I gave you there. It's a complex area again, and I can't in 5 minutes certainly summarize it all, but three important reasons why we feel TVA is going the wrong way when they shift from coal to nuclear. COAL-A VIABLE OPTION First is that coal is still a viable option. No question about that. There's plenty of coal in the southern Appalachians which would help our economy, not the economy of New Mexico or South Dakota or somewhere like that where they're going for uranium. It will help us, it's there. The acts which you in Congress have passed in the last several years make coal an even more viable alternative. The Surface Mining Act, the Clean Air Act, and the Deep Mining Safety Act, all of those make coal much more viable an alternative, so why the big turn? Why the about face switch to nuclear? CONSERVATION Second, conservation. Congress' own investigative arm, GAO, `has said that TVA is overemphasizing the demand side of the equation. We agree with GAO, we feel they are overestimating and they also are not emphasizing enough conservation. They need to work on con- servation and that can make a difference. It made a difference for a while, and still is to some extent, in the gasoline thing. When we started-when the crisis occurred several years ago, all of a sudden there was a difference in the use of oil for gasoline because people were conserving. They're getting away from that now, unfortunately, maybe they'll have to get back to it. NUCLEAR OPTION A DISASTER FROM ECONOMIC STANDPOINT ~Finally, and most important as I've indicated, the reasons we ques- tion TVA's switch is that the nuclear option quickly becoming what we feel is a disaster area from an economic standpoint. Now the Sierra Club, of course, is concerned about nuclear from an environmental standpoint. But I have to point out that very few nuclear powerplants Thave been stopped for environmental reasons. Now there's a couple `of big exceptions, well-publicized by the newsapers and TV's and so forth, but except for the one in New Hampshire, one in California, `maybe Hartsville-well, Hartsville is stopped-except for a couple of exceptions, environmental considerations have not stopped nor sig- nificantly slowed the construction of nuclear powerplants. I found this ~out very quickly as far as Phipps Bend is concerned. I was aware of the citizen opposition to that but it got nowhere. There was simply no way to stop that; it went ahead, we did no slow it down one iota. However, economic considerations are stopping nuclear power- plants. There's really no question about that. Last ye.ar only 2 new PAGENO="0103" 99 nuclear powerplants were ordered, 12 were canceled. So privateS util~ ities are quickly realizing that there's problems. I quote-you can quote a bunch of people and there's books coming out all the time on this but William Mooz of the Rand Corp., says, "You have to wonder if nuclear can be competitive." And he's not a strict environmentalist or anything like that. He's talking also primarily of construction costs. If you figure in all these other costs, the cost of maintaining the nuclear powerplants, the increased security problems, the increased skyrocketing cost of fuel, because uranium is going up just like coal- the price is different but it's also accelerating-the cost of decommis- sioning and the cost of maintaining these plants forever, which literally we've got to do, and that ought to be figured into the cost of them be- cause somebody, the ratepayers are going to have to pay for that. If you figure all those in, nuclear power is really not a bargain when you compare it with coal and other options which are further down the road but are going to be there if we get with it. Even though you've got this switch from nuclear power by the pri- vate utilities, in the midst of all this TI/A is, to me, blissfully going ahead with a full-scale nuclear conversion. They seem to really be putting their head in the sand as far as what's going on in the rest of the country as far as the nuclear program. Other countries, some States, Hawaii, Montana, I think just this past election, passed refer.- endums either restricting severely or banning nuclear powerplants. It's happening throughout the world and it's frequently for economic reasons as much or more as for environmental considerations. But in spite of this TI/A is going ahead to become the biggest nuclear utility in the world and that's what they want to be, I guess. They want the biggest, which they're getting at Hartsviiie; they want the most, which they're also geting with the seven that they have planned. And, of course, we're going to have to pay for all this, which will cost more, 1 think, without any question, than coal would. TVA'S DEBT OUT OF LINE WITH PRIVATE UTILITIES So, based on this, I don't want to turn this totally into an anti- nuclear statement but it is, really, because that's where the increased costs are coming from, the nuclear program. So, because of this, we urge you to vote against and work against any increase in TI/A's current debt ceiling. Their debt is already pretty high and probably out of line with private utilities. And I'm no economist but I have calculated some rough calculations based on figures from stockbrokers as to other companies' debts and from TI/A based on their debt and so -forth. Based on that, for each megawatt of ge.nerating capacity, 1)uke Power has about $177,000 of debt. Southern Co., which is Ala- bama Power and Georgia Power has $198,000 of debt. And TI/A, in pretty sharp contrast, has $266,000 of debt. So TI/A's debt right now, and we're not even talking about this over $15 billion, or next year when it's going to go up to $9 billion, TI/A's debt is already out of line with private utilities, substantially out of line and it's going to get worse. The result of all this might be the cancellation of one or more of TI/A's nuclear powerplants, maybe the last two, Phipps Bend and Yellow Creek. If so, I think that's good. I think that they can convert PAGENO="0104" 100 to coal plants and we'll come out better economically. And that's what I'm talking about really is economics. Let's let TVA economize for a change. They can handle the prob- lems. They're overstaffing in TVA, there are inefficiencies. I'm sure, before you became* Senator, you know .of those rumOrs and people talking about how TVA could saye money if they would just get rid of the deadwood and that kind of thing. That may be everywhere in the Federal Government, I don't know-I hope not-but it's cer~ tainly in TVA. They could economize. Let's let TVA encourage conservation of energy. They can do a lot more on that. And continue using our coal in the Appalachian district. INTEREST ON TVA DEBT ONUS TO RESIDENTIAL CONSUMER Otherwise, $30 billion is just a horrendous figure to think about the taxpayers in Tennessee and the Tennessee Valley paying the interest on, much less paying back the principal. Another calcula- tion, the interest alone if they do get up to $30 billion-of course, they say we won't borrow all that, maybe-but if not, why are they asking for $30 billion ~ And that's a good question I've got. If they don't need it, why don't they get it as they need it ~ But they're asking for $30 billion. Anyway, the interest alone on that, assuming that it's borrowed at 8 percent, would be $2.4 billion dollars a year, which is about $1,000 per residential consumer in the Tennessee Valley. And that's not totally accurate because, of course, some of that would be paid by commercial businesses and commercial users of electricity. But still, that gives you an idea, when you're talking about a debt that provides $1,000 of interest a year for every residential consumer. that's a lot of debt repayment, much less the principal. You can't forget repaying the principal, of course. So, in summary, it's our feeling that TVA, as far as their nuclear power program is not going to economize; their only solution is a solu- tion I hope we've gotten away from-throwing more money at it. Con- gress in the past has had that attitude; I think they're getting away from it. So hopefully, Congress will restrain TVA's spending and the best way to do that is simpy a proposition 13 in the form of a refusal to increase their debt ceiling. Make them live within their means. Make them live within their means like other private utilities have to do. So we urge you to take a good look at it and not to simply go along with it as Congress has in the past, because TVA wants it. Thank you, Senator. Senator SASSER. Thank you, Mr. Skelton. PREPARED STATEMENT OF WILL SKELTON, TENNESSEE CHAPTER OF THE SIERRA CLUB My name is Will Skelton and I would like to make several comments on behalf of the Tennessee Chapter of the Sierra Club in connection with the proposed increase in the debt ceiling of the Tennessee Valley Authority. TVA has long been recognized as a yardstick utility for low electric rates, thanks principally to abundant natural resources. That reputation was, in TVA's early days, due to abundant hydro generation capacity, similar to that found on the Columbia River in Washington. When the prime hydro sites proved insufficient, TVA turned to coal generation of electricty and benefited from the Valley's proximity to massive reserves of coal. TVA is now, unfortunately, turning to a third primary source of generating capacity-nuclear. PAGENO="0105" 101 TVA OVEREMPHASIZING NUCLEAR ALTERNATIVE PVA is currently constructing and/or plans to construct 6 nuclear power plants,. plus Brown's Ferry which is already operational. Their construction is the pri- mary reason for our being here, and the need for TVA to borrow up to 30 billion dollars. We feel TYA is overemphasizing the nuclear alternative to the exclusion of other viable alternatives and, as a result, is sowing the seeds that will make TVA a yardstick utility in the future-but on the high side of the scale this time. Why do we feel this way? 1. Coal continues to be a viable option for the short and middle term future. Coal reserves in the Southern Appalachians are still massive-200 years or so worth. The Surface Mining Act and TVA's finally agreeing that the Clear Air Act applies to TVA reduce significantly the environmental problems of coal. The Mine Safety Act can make deep mining safe, if enforced. New techniques can and will make coal more efficient, safer and cleaner. 2. Conservation can make a difference. Congress' own investigative arm, the GAO, has confirmed TYA's overemphasis on future demand and underem- phasis on conservation. STRAIGHT ECONOMICS KILLING NUCLEAR POWER 3. Finally, and very important, the nuclear option is economically becoming a disaster area. The Sierra Club is, of course, principally concerned with the environmental hazards of nuclear power. However environmental objections have stopped or slowed the construction of very few nuclear plants, with a few well publicized exceptions. Instead, straight economics is killing nuclear power. William Mooz of the Rand Corporation says regarding price escalation of nuclear power: "You have to wonder if nuclear can be competitive." He is talking prin- cipally of construction costs; if you calculate also the increased costs of secur- ity at nuclear plants, the skyrocketing cost of nuclear fuel, the cost of decommissioning the plants after 35 years or so, and the cost of maintaining the site and waste material forever, then nuclear power is certainly no bargain. Private utility companies are realizing the uncertain economics and, as a re~ult, only two nuclear reactors were ordered in 1978, while twelve were cancelled. For both economic and environmental reasons, numerous states and other coun- tries have severely regulated or banned nuclear power plants. And yet, in the midst or what is certainly a huge question mark over the future of nuclear power, TVA blissfully proceeds toward placing a greater and greater reliance on nuclear power; more than any other large American utility. TVA wants the biggest nuclear power plant, and they want the most nuclear power plants. And, the price tag for this extremely expensive technology will be paid by the consumer, who's had little opportunity to support or oppose the decisions being made by TVA. TVA DEBT CEILING TOO HIGH We urge you to vote against and work against any increase in TVA's current debt ceiling of 15 billion dollars, which is probably already too high. TVA's debt is already proportionately higher than most other utilities, which should raise some rather serious questions for Congress. For example, for each megawatt of generating capacity, Duke Power has $177,109.11 of debt. The Southern Com- pany has $198,988.65 of debt, and TVA, in sharp contrast, has $206,360.85 of debt. The comparison will worsen as TVA's nuclear program continues, especially if the debt is raised. In 1979, for example, TVA will have $366,638.06 of debt per megawatt of generating capacity. If time result of no increase in TVA's debt ceiling is the cancellation of one or more nuclear power plants, so much the better, for the reasons discussed before. Instead, let TVA economize for a change (their overstaffing and in- efficiencies are widely discussed and known) ; let them encourage and even require conservation of energy; and let them continue using our local supplies of coal rather than going to North Dakota or New Mexico for uranium. Otherwise, a 30 billion debt will mean an oppressive burden on the rate payer, and even the 30 billion may not be enough (they told us only a short time ago that 15 billion would be enough). The interest alone on 30 billion dollars at 8% per annum would be 2.4 billion dollars a year, or $1,000.00 per year for every TVA residential customer. Of course, TVA may not borrow the full 30 billion (but they're request- ing authority to) and the full interest charge would not be passed on solely to residential customers; however, the magnitude of the rate payer's potential liability is clear. PAGENO="0106" 102 TVA will apparently not economize itself; their only solution to an obvious problem isto throw more money, our money, at it. Hopefully, Congress will act to rec~tain TVA s spending habit We support a proposition 13 for PYA in the form of a refusal to increase their current debt ceffing. * Thank you. Additional Information: Total Company generating capacity (megawatt~)' Totaldebt' Duke Power Southern Co 12, 466 23 ~32 2, 204,300,000 4 702 500 ~)00 IVA 227,031 37,200,000,000 1 Late 1978. 2 TVA, system capacity publication dated Nov. 9, 1978. 3 Knoxville Journal, Jan. 29, 1979. Note: TVA residential customers: 2,400,000. NO PUBLIC HEARINGS ON REQUEST TO RAISE DEBT CErLING Senator SASSER. You may have alluded to this, previous witnesses have, about the fact that there have been no public hearings or no citi- zen participation in the request to raise the debt ceiling by $15 billion. In the questions which I have submitted to Mr. Freeman, in writing for the record, there is a question in which I asked why there had been no citizen participation. We have statements from the League of Women Voters which they have asked to submit for the record und without objection they will be incorporated into the record.' We also have communications from the Nashville Electric Power Board, which also will be incorporated into the record.2 DIFFICULTY IN FORECASTING ELECTRICAL DEMANDS OF FUTURE Well, since we've heard the last witness today, as I reflect on the information developed at this hearing, I'm struck by the dif- ficulty of forecasting accurately electrical demand in the future. This is, of course, a critical issue because it relates to the need for addi- tional power facilities and that relates, of course, to the rate base as has just been pointed out and that relates to what people pay for electricity. The testimony we have received today has been very helpful to me and very informative. I think it will be helpful and informative to many of my colle'igues We have explored many critical issues today and I intend to study the information we've developed very thoroughly and very carefully. The data developed here will be useful to the Budget Committee in the annual review of the new budget authority requested in President Carter's fiscal year 1980 budget request. I look forward to continuing to work with the officials of the Tennes- see Valley Authority, the General Accounting Office, the University of Tennessee, the Oak Ridge National Laboratories, and other public groups and agencies in guiding TVA to an even greater future, a future that hopefully will be more responsive to the people, a future 1 S'e p, 112. 2 See p. 113. PAGENO="0107" 103 `that will be responsive to reality and a future that will be responsive to the public interest. And I want to thank all of those who testified today and express my gratitude to them and to thank them for their coopera- tion nnd their assistance. All have contributed, all have sought to be helpful and all have been helpful, and we appreciate it. Thank you very much and this hearing is adjourned. WRITTEN QUESTIONS FROM SENATOR SASSER TO THE GAO, AND THE RESPONSES POTENTIAL OF INSTJLATION PROGRAMS Question 1. I think all of us agree that conservation efforts should be in- creased throughout the country. The National Energy Plan set a goal of insulat- ing 90 percent of all residences by 1985. The GAO report says this goal will be difficult to achieve, particularly in the TVA area. Why does the GAO paint such a pessimistic picture of the potential of insulation programs? Answer. `We certainly agree that energy conservation is important and efforts `should be increased to `attain maximum conservation. Consumer decisions to invest in energy conservation are usually based upon economic factors and this `is the basic reason we feel the 90 percent goal of insulating all e'xisting residences by 1985 will not be attained in the TVA area. TVA has lower electricity rates than most of the United States which means a longer payback period to recover `insulation investments. The TVA region also has mild winters-2,900 heating degree days compared with 4,900 for the Nation as a whole-which would also impact on economic decisions. We poin'ted out in our analysis of the National Energy Plan (An Evaluation of the National Energy Plan, EMD-77-48, July 25, 1977) that potential problems could inhibit the attainment of the 1985 goals `for the country as a whole. COGENE14ATION IN THE TVA REGION Question 2. I am a strong advocate of cogeneration. I cosponsored the Co- generation and Waste Heat Utilization Act in the last Congress which was eventually incorporated into the comprehensive energy act which became law. I was very impressed with GAO's assessment of the potential use of cogeneration `in the T~7A area and the Nation. Please elaborate for this hearing the potential of cogeneration in the TVA region. Answer. We agree that cogeneration is an area with potential to displace generating capacity and cut fuel use not only in the TVA are'a but throughout the country. As our report points out, cogenera'tion is generally considered to `he most cost effective at boiler sizes greater than 200 MMBT[J an hour. We `identified 60 boilers this large or larger in the TVA region. Based on the existing capacity of the 200 MMBTU an hour and the larger boilers in the TVA region, the potential capacity for cogeneration is estimated at 7-14 billion kWh/yr. `The following table shows projections of this potential to the year 2000 and con- verts this potential into an equivalent central station capacity. Cogeneration potential 1 Equivalent central Year (billions of kilowatt- hours per year) station capacity 2 (megawatts) 1977 1985 1990 7-14 13-20 23-26 1, 200-~ 300 2,100-3,300 3700-4300 2000 32-41 5,200-6,700 1 The following rates of electricity generation per million Btu of steam are used: steam turbine=50 kWh, gas turbine ~200 kWh, combined gas/steam turbine~=300 kWh, diesel=400 kWh. These figures presented in this column represent `weighted averages of these technologies. It is assumed that in earlier years greater use will be made of the steam turbine `while in Inter years greater use will be made of the gas and combined turbine systems. For example, the low 1977 estimate assumes all steam turbines while the low 2,000 estimate assumes an average kilowatt-hours per year per million Btu of steam of 140. 2 This range assumes operation at a 65- to 70-percent capacity factor. PAGENO="0108" 104 OBSTACLES TO ADOPTING COGENERATION SYSTEMS Question 3. What obstacles to adopting cogeneration systems exist and how would the GAO recommend overcoming those obstacles? Answer.. Our report pointed out that development of cogeneration systema hinges a great deal on the attitude of utility companies. An industrial cogenera- tor might either have excessive capacity or it might require a back-up source of supply. In both cases, the cooperation of a utility and agreement on reasonable power exchange rates would be required. Neither are likely to be in the utillty'~ best interests if electric utilities contiritie to have a large excess capacity in the near future. Several other factors contribute to a lack of industry interest: Reluctance to generate electricity because of the capital intensity and. relatively low rate of return. Desire to avoid regulation by State and Federal Agencies. Current electricity pricing policies which now provide industry the bene- fits of average cost pricing and in some cases, declining block rates. Uncertainty regarding optimum equipment and fuel systems. Uncertainty with regard to trained manpower for operations. The need for added space for cogeneration facilities and the regulatory requirements that must be satisfied in constructing such new facilities. Factors which contribute to a lack of utility interest include- a reluctance to employ capital to serve a limited number of steam customers, and unwillingness to purchase electrical power from sources which they do not own or controL Most of the obstacles to adopting cogeneration systems result from an assump- tion of industry ownership. If cogeneration units are owned by utilities the prospects are much more favorable: Cogeneration may be economically advantageous to utilities facing con- struction delays of an optimum size. The regulated utility industry might undertake a cogeneration investment with a lower rate of return. Electricity transmission and distribution cost are a major cost factor / in cogeneration Industry connections with utility grids used solely for con- tingent and/or periodic power. These are costly because of the low capacity factors. If power is exported to the utility the capacity factor can increase sharply, significantly redudng "standby" costs. Although our report did not make specific recommendations to overcome oh- stacles to cogeneration, we did recommend that TVA undertake a major applica- tion/demonstration of cogeneration technologies which could lead to increased interest from the utility industry. RESIDENTIAL CONSUMPTION TO DROP IN FUTURE Q~testion 4. The GAO report assumes that TVA electric rates may increase in the future in real terms. The report states, "Electricity consumption is sensi- tive to price changes. A 1 percent increase in the real price of electricity could' lead to a 15.7 percent reduction in residential demand by the year 2000." I would' like to point out that in the past 13-14 years. the residential price of electricity has. increased more than 200 percent. Certainly, TVA rates have increased in real terms, taking inflation into account. So, if your statement is correct we would' expect to find that residential consumption has decreased during this period. However, it is my information that in 1965 the average TVA residential customer used 10,381 kilowatt hours of electricity. Last year the average residential cus- tomer in the valley used 16250 kilowatt hours, this is an increase of more than 60 percent during this period when rates have escalated so rapidly. So my ques- tion is this. How can the GAO say with certainty that if the real price of TVA electricity increases in the future, then demand will be reduced, when recent history indicates a different pattern? Answer. We cannot say with certainty that if the real price of TVA electricity increases in the future, then demand will be reduced. Recent history does mdi- cate, however, that electricity demand is falling not only at TVA but throughout~ the U.S. as electricity rates are increasing. What we are saying is that demand~ for electricity will be increasing. hut not at levels as high as once projected. For example. TVA's demand projections a few years ago were reflecting 6 and T' percent annual growth rates but are now reflecting 4 to ~ percent annual gro wtk PAGENO="0109" 105 Tates. A recent article in the Wall Street Journal points out that, "Utilities around the country are finding that electric use is increasing at a mutth lower rate than anticipated." We are not sayitg that demand per household will de- dine but that demand is anticipated to increase, but not as great as once anticipated. `WRITTEN QUESTIONS FROM~ ~~SE~NATO'R SASSER TO TVA, AND THE RESPONSES TVA DEBT CEILING Question 1. What is TVA's present debt ceiling? When was it raised to this ievel? When the last increase was made, TVA indicated that it would last for five or six years, correct? Why has TVA bad to come back to Congress early, if that is so? Answer. The present TVA debt ceiling is $15 billion. It was increased by $10 million to the present level in November 1975, by P. L. No. 94-139. At that time TVA indicated that the increase would be sufficient for approximately five years~ This is in keeping with the legislative intent of the 1959 self-financing amendment. The remaining balance of the $15 billion will not provide enough funds for proj- ects already underway. Our request is, therefore, necessary to complete eNisting projects; and it is needed now because TVA cannot contract for any additional facilities since adequate financing authority is not in place to ensure, their completion. MULTIYE ~R BIJDGFIING Question 2. The Budget Committee-and the Federal Government as a whole, for that matter-is moving toward increased use of mültiyear budgeting as a means of improving our control of Federal expenditures. Do you think TVA, as a part of the Federal budget should be subject to the same discipline~ In this regard, how long do you anticipate this $15 billion increase lasting? Do you anticipate having to increase that level in future years? Answer TVA is subject to such discipline We use multiyear budgeting in the management of our power program Because the construction of new geneiating facUlties takes 10 to 12 years, the long-term nature of many of our contracts and the need to maintain stability in meeting our utility responsibility, it is imperative that we plan and budget on a multiyear basis. On an outstanding obligations basis, the current ceiling will be exceeded in fiscal year 1981 and actual borrowings will reach the $~5 billion level in fiscal ye'ir 1983 However the ceiling is already limiting our ability to make decisions to begin the construction of additional generating capacity. We are requesting the increase in borrowing authority to permit TVA to make decisions and to start the new plants that will need to be started between now and 1985. If the Tennessee Valley region continues to grow and demands for electricity continue to grow, TVA will need additional authority to borrow to finance the plants that will be needed beyond those provided for in our current request in about five years. $15 BILLION DESIGNED TO COVER PROJECTED INFLATION Question 3. What are you projecting inflation to be for the period this $15 billion is designed to cover? Have you allowed for inflation in this figure? Answer. Yes; the anticipated escalation rate for construction of new generat~ ing facilites is 8 percent per year over the 1979-1995 time period. This reflects an overall inflation rate for the economy of between 5 and 6 percent during this time period as measured by the implicit GNP deflator. * DI5TRIBUTION OF $15 BILLION FOR TVA PROJECTS Question ~. What portion of this amount will be used to cover costs for ongoing projects? What portion of the amount will he allocated for new construction? Are you including the full costs of these projects in your planning, as TVA has done in the past? Answer. About $4-$6 billion will be needed to cover the capital costs of all power program activities, including pollution control, transmission and con~ *servation facilities, and the conipletion of the generating plants now under ~on~ struction, depending on the extent of inflation. PAGENO="0110" 106: The remainderof approximately'$ll billion would be used for the construction of new generating facilities beyond the Yellow Creek plant. The full cost of completing, these plants has been included in the $15 billion. FINANCING $15 BILLION BORROWING AUTHORITY Question 5. What source of financing do you anticipate using with the addi- titnal $15 billion in borrowing authority you are requesting'? What is the cur- rent total in outstanding debt for TVA? How much of that is in short-term notes~ and how much in long term? What length of maturities do you anticipate as- suming for future obligations? Answer. The additional $15 billion authority requested will be issued in part to~ the Federal Financing Bank and in part directly to the bond market. The exact mix b~s not been determined and will be affected by a number of factors. As of February 21, 1979, TVA's total outstanding debt was $7,785 million. Of this amount $1,760 million is short-term debt with original maturities of less than one year and $6 025 million is long term Futuie issues will continue to be a mi~ of long- and' short-term maturities but the basic debt of TVA will most likely con- tinue to. be Its traditional 25-year bond. INTEREST COSTS ON TVA INDEBTEDNESS Question 6. How do you finance current interest costs of your outstanding debt?- What will be the financial source for interest payments on your future borrowing? Answer. Current interest expense on debt is financed from revenues froni the- sale of power. This is required by Section 15d of the TVA Act; consequently, It will apply to financing interest payments on future debt. FINANCIAL RISK OF NUCLEAR CONSTRUCTION Question 1. The Federal Financing Bank does not alter its interest terms ac-- cording to different uses of its funding. Do you think there is a higher financial risk involved In borrowing for the construction of nuclear power facilities over conventional facilities? Would you say there are higher "front-end" costs asso- ciated with nuclear power facilities, and if so, can you describe them? Would you say there is a longer lag-time for nuclear facilities from the time of initIal, investment and the eventual benefits? If so, is there a higher interest cost in- volved and how much? Answer. There are certainly financial risks associated with construction of - nuclear facilities, but it is very difficult to state clearly that such risks exceed those associated with other types of generating facilities. For example, it would have been very difficult to have foreseen the risk associated with ownership of oll fired facilities prior to the oil embargo Theie are also uncertainties related to environmental effects of coal-fired plants. Our engineers, as well as a number of national engineering firms who are knowledgeable in the area of construction costs of electric power plants genetally state that fully equipped conventional coal-fired facilities cost about 20 percent' less than similar nuclear facilities. These higher front-end costs primarily reflect longer lead times, but they do mean that interest costs are higher for nuclear plants than for conventional coal-fired plants over the life of the plants. There* is a generally accepted view that nuclear lead times are about two years longer' than conventional coal-fired plants from point of initial investment to commercial operation, These costs are offset `by the lower cost of nuclear fueL Primarily because of the longer lead times, the amount of interest paid during' the period of construction is substantially higher for a nuclear plant than for a coal-fired plant. Interest dtiringeoiistruetion may account for 30 percent of the~ total construction cost of anuciear'plant compared with 15 percent of a coal-fired plant. Thus, interest costs associated with a nuclear plant are considerably higher' during the periods of both construction and operation. VARIANCIS OF CAPACITY COST Question 8. How much does 1,000 megawatts of capacity cost in today's dollars? * How much do you expect that cost to increase in the next 5 to 10 years? Answer. Capacity costs vary significantly depending on the technology used - for generation., For example, in today's dollars `a nuclear generating plant might'. PAGENO="0111" 107 run about $800 per kw while a fully equipped conventional coal fired plant might: run about $700 per kW. For a mix of generating plant types such as, might be put in place over a period of years, the estimated cost of 1,000 megawatts of capacity might average about $750 million in terms of today's dollars. Based on. an escalation rate of 8 percent per year, we would expect to pay about $1.6 billion for 1,000 megawatts of capacity for plants committed by 1985. COST OF NUCLEAR PLANTS UNDER CONSTRUCTION Question 9. Tell us again, what are the remaining costs of your nuclear power' plants under construction and on order? Answer. Based on current cost estimates, the remaining cost to complete our nuclear power plants under construction, calculated on an obligations basis, was about $6.4 billion at the end of fiscal year 1978. However, I am afraid that with continuing inflation, that figure may go $1-$2 billion higher. COST OVERRUNS IN TVA CONSTRUCTION PROGRAM Question 10. The GAO testified this morning that they have recently been~ studying cost overruns in TVA's construction program. They have indicated that remaining costs total $11.8 billion. Why do you and GAO have such different estimates? Answer. We have conferred with GAO and apparently the $11.8 billion repre- sents the total cost of TVA's nuclear plants under construction-not the remain- ing costs to complete these projects. TVA's current estimate of the total cost of' all of its nuclear plants presently under construction is $11.895 billion which is in close agreement with GAO's estimate of the total cost of these projects. However, we are afraid that both estimates do not take sufficient account of inflation that' may persist. RECOMMENDATIONS FOR 5AVING5 IN TVA CONSTRUCTION Question 11~ Recently a private consulting firm reported to the TVA that TVA could save $200 million in future capital investment of nuclear power plant construction. Please outline the recommendations that were made and tell us how TVA plans to implement them. Answer. TVA hired the management consultant firm of Theodore Barry and Associates to perform a management performance review of the Office of Engi- neering Design and Construction. There are 115 recommendations contained in their report. The recommendation with the greatest potential saving is improvement in utilization of the construc- tion work force. We have already implemented this recommendation at our Hartsville project through a contract with Theodore Barry, and will expand this program to other projects as quickly as possible. Other significant recom- mendations were centered on improvement in project control, financial manage- ment, procurement, organization, and support services. Each of the recommen- dations has been assigned to a line or staff manager who is responsible for devel- oping an action plan including a timetable and an evaluation of resources required and benefits expected for each item. Many of these recommendations were already begun prior to the completion of the report. We believe significant savings can be achieved but no specific estimate has been made by Theodore Barry or TVA. ALTERNATIVE LOAD~ FORECASTS Question 12 The GAO report states that TVA s past planning has been almost entirely dependent on a single demand forecast for a 15-year period. You have stated that you agree with this criticism that a range of estimates is more ap propriate Further you state that TVA no longer has a single estimate of future demand. If you are no longer using a single demand forecast, when did you change this praotice, before or after you had,,, ,received word that the GAO report was going to be critical of your earlier projections'? The GAO report recommends that TVA create a comprehensive, long-range power program plan extending for at least 25 years. Previously, TVA's single demand forecast has been for only 15 years. Do other utilities utilize 15-year or 25-year forecasts? Since you have stated that you no longer have a single estimate PAGENO="0112" 108 of future needs, can I assume you have lengthened the range of your forecast from 15 to 25 years? 4nswer. TVA began developing range~s of estimates before the GAO review. However, the first official use of alternative load forecasts was in the July 1978 forecast after GAO had reviewed TVA's forecasting procedures. Other utilities prepare forecasts which range anywhere from 10 1)0 25 years. TVA's July 1978 load forecasts and TVA's February 1979 load forecasts have been prepared in detail to the year 2000. LONG-TERM FORECAST USED IN DETERMINING BORROWING AUTHORITY Qitestion 13. When the TVA requested the Administration to recommend an additional $15 billion in borrowing authority, did you make your assumption bas~d on a single short-term forecast or based on a more comDrehensive long- term forecast? Answer. TVA used a set of long-term comprehensive forecasts extending to the year 2000 in determining the appropriate increase in borrowing authority. BROADER PUBLIC INPUT IN TVA DECISIONMAKING Question 14. At this point in the record, I would like to Insert a copy of TVA's news release announcing the request for an increase in the bond ceiling. Chairman Freeman, you have advocated, as Chairman of the TVA Board, broader public input to TVA decisionmaking. You have held a number of public meetings throughout the Valley and I understand that more are planned. I commend you forthat effort. I think TVA should continue to seek public opinion. However, it is my understanding that the decision to seek a $15 billion increase in bond authority was made without seeking the advice of the TVA consuming public. Why did TVA fail to seek input from its customers in this instance? Answer. The increase in TV4's debt ceiling was submitted to 0MB as a part of TVA's legislative proposals for consideration by the President as a part of his fiscal year 1980 program. Public disclosure of proposals of this nature have historically been considered privileged until the President submits his program to the Congress, Consequently, public discussion of the proposed increase was inappropriate. The public hearings on the bond ceiling request are being held by the Congress, which is the decisionmaking body. As you point out, TVA has held a number of public meetings throughout the Valley. The number of meetings and the breadth of the subject matter is revealed in the following tabulation of TVA's public participation events since January 1, 1978. As the tabulation suggests, TVA is making every effort to obtain customer ii~tput on specific decisions and will continue this practice as decisions are made in the future. Subject and date Location Decision by TVA not to approve plans for Chattanooga, Penn. two small bridges across embayinent on Nickjack Dam: Jan. 30, 1979. Uranium Jan. 25, 1978 Orownpoint, N. Mex. July 25, 1978 Orownpoint, N. Mex. Transmission lines: Jan. 9, 1978 - Chattanooga, Penn. Mar. 7, 1978 - Guntown, Miss. Apr. 11, 1978 Russelville, Ala. Apr. 13, 1978 New Albany, Miss. Apr. 14, 1978 Somerville, Tenn. June 12, 1978 Hopkinsville, Ky.; Cadiz, Ky. July 31, 1978 Gallatin, Tenn. Sept. 25, 1978 Elizabethton, Penn. Oct. 16, 1978 Clarksville, Penn. Oct, 17, 1978 Springfield, Penn.; Gallatin, Tenn. Nov. 30, 1978 Jamestown, Penn. Feb. 6, 1979 Church Hill, Penn. PAGENO="0113" 109 Subject and date Location Rates: Aug. 28, 1978 Knoxville, Nashville, Memphis, Chattanooga, Penn.; Paducah, Ky.; Tupelo, Miss.; Huntsville, Ala. Nov. 21, 178 Knoxville, Nashville, and Memphis, Penn.; Bowling Green, Ky.; Tupelo, Miss.; Florence, Ala. Feb. 20, 1979 Knoxville, Nashville, and Memphis, Penn.; Paducah, Ky.; Tupelo, Miss., Huntsville, Ala. Ocoee No. 2: Rehabilitation project-Oct. Cleveland, Penn. 12, 1978. Additional public meetings alrea4y scheduled for 1979 Subject and date Location Uranium: Mar. 1, 1979 Edgemont, S. flak. Chattanooga office complex: Late March__ Ohattanooga, Penn. Service practice standards: Mar. 1, 1979 - Memphis, Penn. Mar. 6, 1979 Nashville, Penn. Mar. 8, 1979 Huntsville, Ala. Mar. 13, 1979 Knoxville, Penn. Mar. 15, 1979 Chattanooga, Penn. Mar. 20, 1979 Paducah, Ky. Mar. 22, 1979 Tupelo, Miss. PoLICY REViEW PROGRAM PVA recently involved a wide range of citizens in the agency's long-range planning process. TVA~ asked P'ennessee Valley consumer organizations to recom- mend citizens to meet with TVA representatives in late October 1978 to discuss issues relating to energy and regional developmnt. Approximatly 200 citizens participated in 36 meetings. The information from these meetings has been analyzed and will be presented to the TVA Board in the near future. TVA'S CONSERVATION PROGRAM Question 15. In PVA's letter to the Governmental Affairs Committee you dis- cussed TVA's conservation program at length. The letter states, "We expect these PVA conservation programs will be productive in promoting conservation and in reducing demand." The GAO report said that if the TVA were to implement the three residential programs proposed in the National Energy Act and the heat pump program, the combined program would produce a net total savings to the region's households of about $190 million. The GAO also estimates that implementing the National Energy Act residential program along with the heat pump program would reduce demand. If they were fully implemented the demand is estimated to be reduced 12-16 billion kilowatts by the year 19~0. Does the TVA agree with this assess- ment and why? Answer. The GAO's high and low projections are 12-16 billion kilowatthours lower than the July 1977 TVA forecast for 1990 when the residential programs proposed in the National Energy Act and the heat pump program are considered. The report indicates that between 3.5 and 4.7 billion kilowatthours of this difference are directly attributable to these programs. The $190 million is the present value of net benefits discounted at 8 percent per year. On pages 5-6 of their report, GAO also indicates that implementation of the three residential programs proposed in the National Energy Act and the heat pump program would result in a reduction in electricity consumption ranging from 3.6 to 6.4 billion kilowatthours by the year 2000. TVA's analysis indicates 45-720-79-8 PAGENO="0114" 110 that the implementation of these programs would reduce demandby 7to 9 bllhi~n kilowatthours- by~ that time. Even~at present rates, this would result in a reduc- tion In the electric bills of residential consumers of between $210 million and $270 million per year when the programs are fully implemented Net savings *Offld be somewhat less than this since it would reflect costs of program iniple- mentation incurred by TVA or borne directly by the consumer We have not tried to verify the GAO estimate of peesent value, but we do not disagree that these programs will yield substantial benefits to consumers. TVA'S INTERCHANGE AGREEMENTS * Question 16. The GAO report points out that the TVA power system is a winter peaking system. Currently TVA has several interchange agreements with various utility companies whose peaks occur in the summer months. Currently this total interchange power of 2,050 megawatts is considered by the TVA to be firm generating capacity during the winter months. However, GAO points out that some of these interchange agreements are being reduced. Please tell us why these agreements are being changed and the effect this reduction will have on the TVA pow~~~ system. Answer. TVA's present level of seasonal interchange is 2,060 megawatts. This seasonal h~tcrchi~nge will be reduced to 1,580 megawatts in November 1979 and further reduced to 1,100 megawatts in November1980. When these contracts were entered into, it was anticipated that the load serv~ed by TVA would continue to peak in the winter even with the seasonal exchange. This has not happened. The actual load levels that TVA has~had to serve with this high level of inter- change have included summer and winter peaks of approximately the same magnitude. The decrease in the level of interchange should improve the reliability of our generating system by allowing maintenance and nuclear refueling to be performed during the summer periods as well as the spring and fall periods. As the system grows, there is not enough margin for maintenance during the spring and fall periods to adequately perform the maintenance requirements. Thus, it has been necessary to reduce the interchange level in order to gain additional time for maintenanceS 000ENERATION SYSTEMS IN TVA AREA Question 17. TVA has recently completed an extensive study of cogeneration potential in the Valley. GAO has estimated that potential to be 5,200 to 6,700 megawatts by the year 2000. Fifty years ago, 30 percent of all U.S. electricity generated at industrial sites was produced through cogeneration. Today that number is only 4 percent. I be- lieve we must make greater use of this technology There are certain bariiers to its development howe~ er The cooperation of a utility and agreement on reason able power exchange rates would be required. And there is the question: Who will own the cogeneration system-TVA or the industry? How does TVA pro- pose to deal ~s ith these barriers'? Answer PVA has a task force working on the development of cogeneration in the TVA region A preliminary assessment of the cogeneration potential is in the final draft stage As a part of this effort we have reviewed the barriers to cogeneration development in the TVA region so that we can develop appropriate methods for overcoming these barriers. The task force's recommendations to the TVA Board of Directors will address the following area: the establishment of appropriate rates for electric power sold by a cogenerator to the TVA grid; the appropriateness of rates applied to the cogenerator's power purchases; provi- sion of technical assistance for the final design of interconnections with the TVA grid, development of operating procedures, and the exchange of operation and maintenance information and guidelines for ownership and financing ar rangements There are practical problems related to TVA owership of equip- ment located in industrial plants owned by private concers. It is possible that TVA and the cogenerator could enter into an agreement for a third party to own the cogeneration facilities at an industrial plant TVA could also provide direct financial assistance to prospective cogenerators The TVA Board intends to develop a speCific policy statement to encourage co- generation in the near future. We will also continue our work in the develop- ment of cogeneration potentials in existing generating plants, building cogenera- tion into energy parks, a central coal-fired cogenerating plant, and the use of other emerging technologies with cogeneration possibilities. PAGENO="0115" iii TVA'S rLUIDIzED COMBUSTION RESEARCH Question 18. Since coming to the Senate I have supported additional funds foi TVA's fluidized-bed combustion research. Presently TVA is working on both pilot Scale and demonstration scale projects. Please give us a status report on these projects. Tell us what you see to be the potential of the fluidized bed in the TVA system. Answer. The pilot plant is in direct support of our demonstration plant effort. A request for proposals is being prepared for release to the boiler manufacturers for the pilot plant on April 15, 1979, and the scheduled operation date is June 1982. Other projects in support of the demonstration plant are the Oak Ridge National Laboratory studies and a cofunded effort with the El'ecric Power Research Insitute for corrosion studies in AFBC units. The 200-MW atmospheric fluidized-bed combustion (AFBC) demonstration plant program is being continued with a final design study by several boiler manufacturers slated to begin in April 1979, and is scheduled for startup in January 1985. Fluidized-bed combustion has the potential for being operational in the TVA system by the early 1990's. Using the valuable data from the demonstration and pilot plants, we are confident that a commercial A.FBC plant can be built during this time period which is lower in cost, higher in efficiency, and more reliable than a conventional coal-fired plant with scrubbers. Such fluidized-beci plants could utilize the lower cost, high-sulfur coals prevalent in the Tennessee Valley, western Kentucky, and southern Illinois. This could reduce TVA's de- pendence on the high cost, low-sulfur coals which are being utilized in the older existing plants. LONGWALL MINING Question 19. The GAO report recommends that TVA do more to encourage the longwall mining technique of extracting coal from underground mines. TVA has indicated that in many cases longwall niining is not the best or even a feasible technique for mining operators. Please discuss that statement for the record. Answer. The lougwall mining method gives better labor productivity and generally gives improved recovery when it is successfully applied; however, it has many drawbacks which limit its application. It is an inflexible system. For example, it can be used only on large continuous areas of coal unbroken by fa iiits or nondeposition and free of oil and gas wells. The seam must also `be of uniform thickness since the cutting equipment cannot adapt to changes in floor or roof elevation without adding extraneous material or leaving good coal behind. If either floor or roof is too soft, the support system will become inoperative or the operation will `be hazardous. A 2-unit longwall mine, the minimum practical size, should produce from 1.0 `to 1.5 million tons of coal per year. To repay the capital investment, a life of 10 years or more would be needed. As a `consequence, the mine would require a minimum recoverable coal reserve of 10 to 15 million tons. Few coal deposits of this size meeting the other physical requirements are `available. Another factor that must be considered is the surface su'bsidence. While the surface can `be preserve'd by conventional mining, subsidence cannot be avoided when longwalling. This fact prevents the longwall method from being used in areas where surface integrity must be maintained. `MORE INTERRUPTIBLE CONTRACTS PLANNED BY TVA Question 20. The GAO report recommends that TVA expand the use of inter- ruptible contracts offered on a regular basis rather than an emergency basis. I know that TVA is now considering such a proposal. Please tell us what you are planning and the effect the change could have on future demand. An'swer. TVA has 749,500 kW of interruptible power under contract with 13 directly served customers. Generally, the contracts provide for reducing T'VA's system peaks by TVA's giving five minutes' notice to suspend delivery of power. It may be~ interrupted up to 12 hou'rs a day, 48 hours a week, 600 hours a year, with an overall maximum of 3 percent of the time over a 10-year contract term. Three older contracts are subject to shorter periodic interruptions and can be interrupted either 2 or 2.5 percent of the time. Three-percent `interruptible powe'r is sold at a discount of 7.1 percent from the current firm' rate,' while the discount for the older 2- and 2.5-percent inter- rnpti'bie pOwer is'only about 1.3 and 2.6 percent, respectively. PAGENO="0116" 112 On February 16, 1979, the TVA Board approved new rates and terms for 5-percent interruptible power that may be made available in amounts of 5,000 kW or larger to any distributor served or directly served industrial customer in conjunction with firm power. TVA's interruptions would be limited to 5 percent of the total hours in a contract term 800 hours in any 12 consecutive months 60 hours in any week, and 12 hours in a day. Delivery of power may be suspended by TVA on five minutes' notice. For these curtailments, the industry would receive a monthly billing credit of up to about 13 percent from the current firm rate. With these new interruptible terms now available, the prospective market for interruptible power is estimated to increase to over 1,000,000 kW of inter- ruptible power under contract in 10 years. Industrial customers not presently purchasing interruptible powei will be given an opportunity to convert part of their firm power requirements to the new 5-percent interruptible power Nego tiations are curently unders ay with four directly served customers to convert 347 000 kW of 3 percent interruptible power presently under contract to the new 5-percent interruptible power terms. TVA also continues to explore with its customers other possible interruptible power arrangements that might prove technologically and economically feasible for the customer and TVA. STATEMENT OF TENNESSEE VALLEY INTER-LEAGUE COUNCIL, LEAGUE OF WOMEN VOTERS, NASHVILLE, TENN. (The Tennessee Valley Inter-League Council (TVILO) is a group of all the local and state Leagues of Women Voters within the Tennessee Valley Author- ity's service area.) IMPROVED COST CONTROL IMPACT ON TVA BUDGET Recently, Theodore Barry & Associates, a private consulting firm, did a man~ agement performance review of the Office of Engineering Design and Construc- tion (OEDC). Though the OEDC is but one office within TVA, its 1.5 billion dollar annual expenditures qualifies it as a major cost center. The potential for improved cost control in the OEDC would have significant impact on the TVA budget. Some of the findings of the Barry report are: (1) The present TVA budget does not adequately reflect the traditional role of the budget as a managerial control tool. It's not a control tool because short and long term funds have been easily accessible to the TVA through the U.S. Treasury and the Federal Financing Bank. With such easy access to money there is little motivation to keep cost down. This is probably best reflected by the fol- lowing suggestion that the Barry report makes to the TVA, that is, "The dollar should be viewed as a scarce resource and should be managed on a fiscal year basis." It seems incredible that the TVA has to be reminded that money is a scarce resource. EXPENDITURE ESTIMATES VARY FROM ACTUAL EXPENDITURES (2) The OEDO expenditure estimates often vary significantly from actual expenditures. In 1977 the cash flow expenditures developed by the Financial Planning Officer were calculated to be 1.6 billion dollars. In a special, one-time study, the Division of Finance calculated actual cash expenditures to be about 3 billion dollars-almost double In its last 8 construction projects OEDC's original estimates have been off by 5 billion, 746 million dollars. Six of these projects are not yet complete and the Barry report comments that there is a "trend toward identifying larger and larger cost increases as each project moves toward completion." The question that comes to mind is how much more will these projects overrun their estimates? Estimating is a TVA-wide problem not confined to OEDC; but OEDC's history of fluctuating expenditure estimates seriously impacts the credibility of any TVA financial plan. (3) For OEDC to make significant strides in its budget program, improved authority, accountability and responsibility must be established. OEDC cannot readily identify the manager specifically responsible for cost and schedule per- formance variances, since responsibillty is widely spread through the branches of TVA The lack of a more explicit accountability obscures responsibility pro- PAGENO="0117" 113 motes finger-pointing, protects poor managers and limits the effectiveness of good managers. TVA IGNORES CONSULTING FIRM5 STUDIES These were but a few of the hundreds of other suggestions made by the Barry report. As citzens who are painfully aware that cost overruns and higher interest payments result in higher rates, it should give us pauses to think that TVA is now asking for a doubling of their loan ceiling. Some of the questions that come to mind are: (1) Could this request of a 30 billion dollar loan ceiling be postponed until there is evidence that the TVA is actively working on the suggestions of the Barry report? The GAO report points out that the TVA in just the past decade had three other consulting firms do studies that the TVA ignored. If there was an economic incentive tied to TVA's account~bility in this area, there might be a better response. (2) why does there have to be a doubling of the loan ceiling? If, indeed it is proven that TYA needs additional money, a much lower rise in the ceiling would force a more frequent review of TVA's financial state. If money was not as easily accessible to the TVA it would have to tighten controls as a matter of necessity. For 59 years the League of Women Voters has advocated efficient and ac- countable government. We would like to thank Senator Sasser for giving u~ this opportunity to express our concerns in this matter. Thank you. TELEGRAM FROM THE ELECTRIC PowER BOARD OF NASHVILLE Nashville, Tenn. Senator JIM SASSER, Post Office Building, Knoaville, Tenn. The Electric Power Board of Nashville endorses the proposal Congress boost TVA debt ceiling from 15 billion to 30 billion. Funds needed to complete con- struction of new energy generating plants should stabilize price of electrical energy to consumers in the TVA area. J. DUDLEY PHILLIPS, Chairman Electric Power Board. PAUL P. HEMBREE, General Manager. TENNESSEE VALLEY AUTHORITY, Kno.'cville, Tenn., January 31, 1:979. Hon. JACK BROOKS, Chairman, Committee on Government Operations, House of' Representatives, Washingtion, D.C. DEAR Mu. CHAIRMAN': We are making this written statement on actions taken by TVA on the recommendations to TVA contained in the General Accounting Office's (GAO) report issued on November 29, 1978, entitled "Electric Energy Options Hold Great Promise for the Tennessee Valley Authority." This state- ment is made pursuant to section 236 of the Legislative Reorganization A~ct `of 1970 (31 U.S.C. § 1176 (1976)). The report contains analyses of some of the issues facing TVA. However, because GAO's investigations were conducted in 1977, the report does not reflect many more recent TVA programs and policies. As further described below, TVA is now actively engaged in the implementation and consideration of essentially all of the report's suggested actions, as well as significant other programs not diacussed by GAO. In large measure the report mirrors TVA's efforts, and, thus we do not view this report as inconsistent with TVA's current programs in this area. The report recommends energy conservation, improved power management, and the use of renewable resources. TVA agrees with the point being made by GAO that there are great potential benefits which may be achieved by these programs. T'VA commenced work in all of these areas long `before the GAO views were expressed. We no longer have a single estimate of future needs- the primary fault GAO finds with our estimates. We agree that a range of estimates is more appropriate. System planning must be based Oil analysis of the potential maximum, as well as minimum, demands. As demonstrated by the Substantially differing projections by various organizations and individuals PAGENO="0118" 114 `considering such matters, there are substantial uncertainties in any long-term forecast of electricity consumption. Accuracy within 15 percent on a 10-year forecast is considered unusual. Even a few percent difference in peak load in the 1990's equates to a 1,000-MW generating unit. The GAO load forecast failed to take into account transmission losses outdoor lighting and interdivisional electricity sales within TVA. Thus, if these elements had been taken into ac- count, GAO's lowest load forecast would have found that TVA. needed 4,000- 5,000 MW of added generating capacity in this century The economic growth in this region will continue to be sigmflcatly greater than that of the Nation as a whole. We currently project that in the next decade the gross product of our region will increase on the order of one-third faster than the Nation's and this will inevitably result in substantial additional requirements for electrical energy. Such growth, combined with the inherent uncertainties in long-range forecasting, requires that TVA. retain flexibility to adjust its construction program as new data are obtained. TVA is undertaking many projects to encourage energy conservation, improve load management, and stimulate use of renewable resources. We expect these programs to succeed and we fully take them into aQcount in our forecasting However there is a 10 to 12 year lead time for building new generating capacity and this too must be taken into account in system planmng In light of these long lead times the TVA Board in carrying out its responsibilities must be careful not to tie the region's future to what may turn out to bo an overly optimistic forecast. The action being taken with respect to the recommendations to TVA is dis- cussed below.. 1. Recommsndation.-TVA [should] prepare a long-range comprehensive plan (minimum of .25 years) with specific short-term goals to be presented to the President and the Congress. This plan should be updated and submitted an- nually. TYA should obtain review of the draft plan from a wide spectrum of the regional population. The Department of Energy should review the plan to ensure that it reflects national priorities and does not duplicate research and development projects and TVA should include their comments as an appendix with an evaluation of those comments. GAO should evaluate the final plan, monitor its progress, and report to the President and the Congress periodically. The Congress would then be in a better position to plan any needed hearings. Response -This is a good idea which TVA was already in the process of implementing. To improve the planning process, the TVA Ofik~e of Power has established a strategic planning staff to formulate and document long-range plans for the power program. This staff is now preparing a comprehensive long-range plan for the power program, and TVA wifi solicit comments on that plan from the public `and state and Federal agencies, including GAO and DOE. 2. Recom'mendation.-TVA should prepare several 25-year electricity demand projections emphasizing energy conservation and the use of renewable resources. Response.-As we earlier informed GAO representatives, TVA's systhm of annual demand forecasts now includes numerous projections, representing a range of economic growth possibilities, potential new technologies, energy con- servation efforts, and trends toward substitution of electricity for scarce fossil fuels. Such a range wa's included in TVA's July 1978 forecasts and will be ex- panded in future forecasts. These projections of use of electricity to the year 2020 allow the TVA Board and staff to consider the range of uncertainties in planning the future of the power system. 3. Recommendation.-TVA should collect more detailed information on all users and uses of electricity. For example, TVA should survey reshfential cus- tomers to determine patterns of ownership for major household equipment, ap- pliances, and housing units and meter individual appliances in homes through- out the region. Response.-TVA has underway a number of studies on electricity end use and additional studies are being planned. These studies involve the installation of special equipment for metering the electricity use patterns of thousands of consumers `and are providing the basic data necessary to consider the appro- priateness of possible new rate designs and make judgments on the feasibility of new equipment. In addition to more traditional patterns of use, the studies will investigate the effects on use of (1) time-of-day rates, . (2) radio-controlled water heaters, electric space heaters and air-conditioners, (3) $uper $aver homes,, (4) special heat pump-heating-cooling storage device tests, and (5) elec- PAGENO="0119" 115 tric furnaces with special brick storage units. In one such study the timing and amount of residential hot water use is metered. 4. Recomrnendation.-TVA should undertake a major application/demonstra- tion of cogeneration technologies which could include: A coal-fired steam turbine system in the several tens of megawatt range. A gas turbine system in the 50-200 megawatts range capable of using alterna- tive fuels (for example No. 6 oil, methanol, residual fuel oil, etc.) in a cogen- eration mode. A fluidized bed gas turbine system coal fired, coordinating its effort with the work of American Electric Power Company. In that company's system, steam from the gas turbine is run through a steam turbine to produce additional elec- tricity. However, the TVA demonstration should be of a size to demonstrate the capacity of feeding excess generation to the network and simultaneously producing process steam for industry. A fluidized *bed gas turbine system fired by biomass, in particular, wood waste. This demonstration could be located at a major wood and paper products complex such as the one in Calhoun, Tennessee. It would show fuel cycles and alternatives to coal and concentrate on industrial and agricultural wastes and perhaps municipal waste. Federal funding should be requested for those demonstrations that exceed TVA's incremental cost per kilowatt. TI/A should continuously assess the potential for new industry cogeneration projects and support industries with such potential, particularly those in newly developed industrial parks. Response.-CogeneratiOn is receiving a great deal of attention from TI/A. We are working actively with industry and public agencies to develop cogen- eration projects and are conducting a number of studies of cogeneration op- portunities. TI/A has recently completed an extensive study of cogeneration potential in the TI/A area, and a detailed report on this assessment will be published in the near future. A program plan to maximize the installation of cogenerating facilities in this area is under development. This program is ex- pected to include the demonstration of various arrangements, technologies, and fuels, including some of those mentioned by GAO. As noted in the GAO report, initial installation of some promising approaches may not be economical at this time. Accordingly, we agree with GAO that appropriations should be used to assist these demonstrations. One area of cogeneration potential being planned by TI/A but not mentioned by GAO is the utilization of waste heat from steam electric power plants. TI/A has examined a number of potential uses for this waste heat, including aqua- culture and greenhouse applications. TI/A is actively working with Rhea County, Tennessee, on plans for an industrial park designed to utilize the waste heat from TI/A's Watts Bar Nuclear Plant. In addition, TI/A recently, in cooperation with the Electric Power Research Institute, conducted a national workshop on waste heat utilization to promote use of this resource now being wasted. 5. Recommendation-In complying with the proposed conslent decrees, TI/A. should follow the maximum demonstration and development of flue gas desul- furization technologies in its coal-fired units, as proposed in chapter 6. Such a program would cost more than simple compliance would require and would entail certain risk. We recommend, therefore, that TI/A request an appropriation for this program for those costs over and above simple compliance. Response.-TI/A's sulfur dioxide program is constrained by the requirement that complianc~ with state and Federal air quality standards be achieved as rap- idly as possible. However, TI/A has not sacrificed the research and development opportunities this massive control program offers. The flue gas desulfurization equipment TI/A is installing will employ a variety of designs, including advanced technology systems, and will significantly advance scrubber development. At our Paradise and Widows Creek plants we will be installing limestone scrubbers which will provide TI/A an opportunity to continue its research in methods of achieving greater removal efficiency from this type of equipment and also to develop solutions to the problem of long-term sludge disposal. On the Jobnsonville plant we are installing an advanced magnesium oxide scrubbing system which will produce sulfuric acid, a useful byproduct, instead of sludge. At Cumberland we are hoping to be able to use an advanced scrubbing system, utilizing an entirely new technology; however, these plans will be dependent upon the approval of a suitable schedule by EPA and the other p'aintiffs in the litigation. We believe this mix of scrubber systems will provide all of the research and development benefits that the report recommends. GAO recommended that appropriated funds PAGENO="0120" 116 be used to cover any additional cost of PVA's utilizing advanced rather than con- ventional scrubbing systems. We agree with this recommendation since such improvements would benefit the Nation as a whole 6 Recommendation -TVA should construct commercial scale atmospheric fluoridized bed combustion Because of the risks inherent in tins unproven tech nology we recommend that this demonstration be funded the same as the co generation technologies above Upon successful demonstration of this fimdized bed combustion we recommend that it be used to meet all major TVA power pro duction facilities required through the year 2000. Response -TVA is taking the lead in demonstrating this technology working on both pilot plant scale and demonstration plant scale projects. If these projects are successful, a commercial scale facility should follow. We agree that this important research and development effort should be carried out with appro- priated funds, and we have obtained both appropriations to TVA and DOE fund- ing for the preliminary work on these projects Because this is an R & D project that will benefit the Nation, we believe Federal funding should comprise a sub- stantial portion of the capital and operating cost Moreover since it would not be appropriate for the ratepayers of this region to bear such costs ~s e believe the Federal Government should assume the risk of the commercial scale project. Upon successful demonstration of the commercial scale facility it will be possible to determine how AFBO should fit into TVA s future power supply plans 7 Recommendation -TVA s future coal purchasing policies should include actively pursuing contracts with coal mine operators who are using longwall mining techniques. Response.-T~VA currently has contracts with four coal companies that utilize longwall mining, and a fifth company will probably add a longwall machine in the near future. However, in many cases longwall mining is not the best nor even a feasible technique for mining operations. 8 Recommendation -Although TVA has recently expanded its conservation and demand management programs it should extend or undertake the following options Increase efforts to implement the National Energy Plan programs. In conjunction with the education and certification of heat pump installation and maintenance actively encourage installation of heat pumps in all new con- struction. Study and implement seasonal and time-of-day rates. Expand the use of interruptible contracts, but offer them on a regular inter- ruption basis rather than an emergency. Initiate a program to switch off hot water heaters and larger air conditioners in peak hours. Evaluate and pursue opportunities for matching variable loads in the region. Response.-TVA is out front in the implementation of the national energy goals Existing TVA piograms particularly the Home Insulation Program have already been expanded and include many features of the National Energy Con servation Policy Act (NEOPA) The Home Insulation Program meludes free en ergy audits and no interest loans for home insulation and other types of weather Ization measures. TVA's existing $uper $aver Electric Home Program encourages energy effi- cient home construction and the use of heat pumps. Public hearings on service practice standards have been officially announced by TVA under the Pub- lie Utility Regulatory Policy Act (PURPA). In addition to the five~ mandatory PURPA standards, four other standards will be considered, including energy- efficient standards for new buildings as a condition of service. With or without mandatory weatherization standards, PVA will accelerate efforts to encourage the use of heat pumps in new homes. The existing Home Insulation Program now includes low-interest, long-term financing for heat pumps in existing homes. The use of electric heat pumps is also being encouraged through TVA s Certi fled Electric Heat Pump Installation Program, which is an attempt to encourage heat pump acceptance by fostering proper installation and service. TVA will also be conducting proceedings pursuant to PURPA and NEPA to consider the ratemaking standards defined by PURPA. Time-of-use rates are in- cluded in those standards. Such rates may be cost effective only for large commer- cial and industrial customers. Seasonal rates will also be examined as part of TVA's overall rate study currently underway. TVA's use of interruption rights under contracts providing for interruptible rights is not limited to emergency situations as indicated by the GAO report. In fact, such rights can be exercised at such times as TVA considers will be bene- PAGENO="0121" 117 ficial, provided such reductions do not exceed the amount specified in the con- tract. TVA is presently considering a proposal where interruptible power ar- rangements would be available to a much larger number of customers and would provide for additional interruption rights under the individual contracts. It is anticipated that the proposed new arrangements would result in increasing total interruptible load under contract from 750 MW to 1,150 MW over the next ten years. A program is underway in four locations in the TVA area-Huntsville, Ala- bama; Jackson, Tennessee; Cleveland, Tennessee; and Tn-County DM0, Ten- nessee and Kentucky-to determine the effectiveness of cycling water heaters, electric space heating, and central air-conditioners during hours of peak demand. The purpose of this test is to evaulate the customer's reaction to this equipment and the cost and benefits to TVA, the distributor, and the customer, and to deter- mine the operating procedure in installing such equipment by the distributor and subcontractor. To the fullest extent feasible, we will include the possibility of matching vari- able loads in the region as part of our load management program. 9. Recommendation.-To further decrease electricity demand, TVA should: Promote the use of solar passive building design with incentives such as de- sign awards for builders similar to the heat pump and Super Saver home pro- grams. Design a strategy similar to the above promotion for solar water beating. In addition, `TVA should provide alternatives for making these systems economically competitive for the consumer (such as reduced rates) since they are less costly to the power system than adding new generation capacity. In coordination with the Department of Energy, participate in the research and development of solar space heating and cooling for applications in the region. If the above options and other TVA initiatives do not adequately reduce de- mand, TVA should consider applying a surcharge or issue bonds that would result in similar impacts to effect additional conservation savings. Money received should then be used as an incentive to further conservation and the use of renew- able resources. Response.-TVA is undertaking a major program to promote the widespread use of solar passive buildings in this region. For example, TVA arranged for the construction of ten solar passive homes to be completed this spring. Under pro- visions of contracts with builders, TVA will pay $2,500 toward the cost of each of the ten homes built to solar passive designs developed by T'VA architects. These homes will be instrumented to gather data on building design performance, and detailed construction costs will be made available to TVA. Cost and building performance data from these ten homes and results of modeling studies currently in progress to determine the benefits to the power system resulting from solar passive homes will be examined prior to estab- lishing incentives for about 200 additional demonstration homes built to several TVA solar passive designs. This second phase is expected to help overcome builder/buyer/lender resistance and provide considerable solar passive visi- bility throughout this region. TVA redesigned the Lakeland Wesley Village, a proposed 96-unit housing project for the elderly, for solar passive space conditioning. Solar designs are under joint study by the sponsoring organization arid TVA to consider the amount of financial assistance TVA could possibly provide to help defray the higher first cost associated with the solar design. TVA regards this project as a much-needed demonstration of solar passive design suitable for retirement villages, dormi- tories, motels, hospitals, and similar buildings. Standards for solar passive buildings are also expected to be an important issue during the hearings and decision process on service practice standards pur- suant to PUItPA. As the TVA solar program progresses, consideration will be given to the use of design award incentives and other incentives to promote solar passive buildings. *The strong TVA commitment to solar energy calls for the prompt use of all means available to develop cost-effective solar applications in this design. `The importance of solar water beaters as alternatives to new generating capac- ity and the consumption of depletable energy forms is fully recognized by TVA. Strenuous efforts. to make solar water heaters economically competitive in this region are being made. TVA has underway a project to install 1,000 solar water heaters in Memphis. This project is expected to demonstrate that the, public is ready to buy and use solar water heating now.. The problem of high first, cost is PAGENO="0122" 118 overcome by an easy monthly payment plan (as part of the electric bill) along with low interest rates. The experience gained in the Memphis project and a study of the problems associated with similar programs for other parts of the region will be helpful in finding effective ways to provide solar water heating systems under attractive financial arrangements. The low-interest rates en- coirage consumers to participate in this project. Significant economic benefits to the TVA power system will result from the use of the solar water heaters under this program. TVA intends to make consumers aware of the life-cycle benefits of solar water heating as a part of the TVA solar program. TVA is currently conducting and planning research and development of solar space heating and cooling, both singly and in cooperation with DOE and with other organizations. TVA is also actively exchanging information with DOE officials to coordinate research and identify the projects which PVA is best quali- fied to conduct. For example, TVA and DOE are currently working towurd the development of an interagency agreement for the application of photovoltaic energy sources in TVA activities. Two applications under consideration are remote area repeater stations and water temperature monitoring required for environmental compliance. TVA and DOE have worked together for several years in connection with the Annual Cycle Energy Systems (ACES) home project at Knoxville, an experiement in residential solar heating and cooling being managed by The University of Tennessee. In addition, a joint DOE-NASA-TVA project to test and evaluate a new dish solar collector whteh is expected to produce heat suitable for industry in the 400-600°F range is being developed, and the staffs are working toward an interagency agreement. We expect these TVA conservation programs will be productive in promoting conservation and in reducing demand. As TVA becomes aware of potential new. conservation opportunities, it will, of course, continue to add to these programs and modify them. The rate surcharge GAO recommended for future consideration is therefore hypothetical at this time and need not be considered now. We would point out, however, that such a surcharge may be inconsistent with requirements of the TVA Act that rates be as low as feasible and that "electric power shall be sold and distributed to the ultimate consumer without discrimination as between consumers of the same class." In any event, PVA is currenly studying possible rate changes to promote conservation, and an environmental statement and hearings pursuant to PURPA are being scheduled for this year to consider such changes. Any rate changes which may result, together with TVA's other conservation programs, will surely accomplish the goal of eliminating wasteful energy consumption. 10. Recommendations.-The Congress should revise TVA's charter to better reflect current national energy priorities. TVA should be charged with: Leading electricity management plans and programs development, Encouraging energy conservation and the most efficient production and use of energy, Encouraging the use of renewable resources, and Assuring adequate public involvement in energy planning and policymaking. Response.-TVA believes that no amendment to the TVA Act is necessary at this time because the energy priorities suggested by GAO are within TVA's present authority and are being aggressively pursued. TVA, long a leader in electricity management plans and programs, has the largest Interruptible load of any power supplier in the United States and is also a leader in system load factor. As described above, TVA is implementing the policies and conducting the studies necessary to maintain its position of leader- ship. This includes TVA's efforts to further Increase interruptible load and the many demonstration programs underway, such as remote switches on water and space conditioning equipment. TVA is providing a yardstick for energy conservation efforts in the Nation. As described in some detail, PVA is working with all classes of consumers to encourage conservation. These programs range from the Home Insulation Pro- gram and the program of energy audits and financing assistance for commercial and industrial consumers to rate reform studies, the $uper $aver Electric Home Program and consideration of proposed service practice standards such as resi- dential insulation requirements. TVA's programs In the use of renewable resources are demonstrating for the Nation the potential effectiveness of such programs. The various solar appli- cations mentioned above, such as the solar water heater demonstration in Memphis, are just one part of this effort. Other efforts include the demonstration PAGENO="0123" 119 of wood stoves for space heating in rural Georgia, wood pyrolysis and gasahol programs, and our other studies of the potential uses of wood and solid waste as sources of energy. The involvement of the public in energy planning and policymaking at TVA: has been achieved `in a number of way's `which provide `a model, not only for energy planning and policymaking, but for decisionmakillg by government agencies in general. TV'A opened its Board meetings to `the public long before the enactment of the Sunshine Act and has continued to encourage dialogue between the pub- lic and the Board at those meetings. In addition to seeking public comment on its environmental statement on policies concerning rates, conducting nuiner~ ous public hearings on rates, and maintaining a continuous dialogue with publicly owned and consumer-owned distributors of TVA power, TVA recently conducted public forum discussions among a number of independent observ- ers of our activities. In the near future TVA, in accordance with PURPA, will conduct public hearings on service practices and rate standards. Environmental statements are now being prepared on power rates and power system planning, and public review will be actively `encouraged. Without further belaboring the point, the TVA Board believes that the TVA Act already provides the necessary authority and purposes to achieve the goals mentioned by GAO without further amendment. If in the future it appears that amendment `of the TVA Ac't `is necessary to permit new policies `or programs, r~y~ will not hesitate to come to Congress and request any appropriate changes. We appreciate the `opportunity `to provide you with this information. Sincerely, S. DAVID FREEMAN, Chaitrman. PANEL ON REGIONAL EcoNoMIc `GROWTH AND ELECTRICITY DEMAND ROBERT A. BOHM Dr. Bohm received `his undergraduate degree (in economics) from Colgate TJniversity `and `his doctorate from Washington University. He joined the staff of The University of Tennessee Department `of Finance in 1968 and currently holds the rank of Professor in that Department. He is also Associate Director to The University of Tennessee Environment Center. In recent years his research activities have related primarily to energy and associated environmental matters. ROGER S. CARLSMITH Mr. C'arls'm;ith received his education at Harvard University (B.S. in Cliem- istry) `and at the Massachusetts `Institute of Technology (M.~S. in Chemical Engineering). He is `also a gra'duate of the Oak `Ridge School of Reactor Tech- nology. Since 1955, be has been a member of the research staff of the Oak Ridge National Laboratory and has participated in a wide variety of energy develop- ment programs. M'r. Carls'mi'th i's currently Director of the Energy Conservation Programs at ORNL. WILLIAM U. OHANDLER Mr. Chandler was educated at The University of Tennessee. His employment has included the Institute `of Energy Analysis in Oak Ridge and he no'w serves as a Research Associate with the U.T. Environment Center'. JOHN H. GIBBONS Dr. Gibbons `received his `undergraduate training at Randolph-Macon and his doctorate from Duke. He came `to The University of `Tennessee in 1973 from ORNL `to direct the newly-formed U.T. Environment `Center. In late 1973 be was on leave of absence from the `Environment Center to `become Di'rct'o'r of Energy OonserVation in the Federal Energy Administration, returning `to UTEC in 1974. WILLIAM C. GOOLSBY Dr. Ooolsby was awarded the B.A. degree by the University of Southern Mis- sissippi and the doctorate (in economies) by `the University of Wisconsin. He PAGENO="0124" 120 joined the staff of The University of Tennessee College of Business Administra- tion in 1972 and currently holds the rank of Associate Professor of Finance. Since 1977 he has been responsible for the maintenance and development of the Tennessee Econometric Model which is housed in the U.T. Center for Business and Economic Research in the College of Business Administration ERIC A. HIRST Dr. first received his education at Rensselear Polytechnic Institute (B.M.E. in Mechanical Engineering) and at Stanford University (M.S. and Ph.D. iii Mechanical Engineering). His professional interests are in policy-oriented re- search on natural resources, particularly energy use. He has authored more than 70 technical reports, journal articles and book reviews. He previously Worked as Director, Office of Transportation Research, Federal Energy Admin- istration, before joining the Energy Division staff as Group Leader in June 1975. He is currently with the Minnesota Energy Agency, on a one-year leave of absence from ORNL. JOHN R. MOORE Dr Moore was educated at Colgate University (undergiaduate) and Cornell University (M.A. and Ph.D.) He joined the University of Tennessee in 1953. He has served as Head of the U.T. Department of Economics, and is currently Professor of Economics and Associate Dean of the College of Business Administration. LOAD FORECASTS (By Lynn C. Maxwell, Assistant Chief, Analysis Branch) INTRODUCTION Load forecasting in today s environment has increased in complexity due to rapid changes in the factors that influence electricity consumption Ihe underlying factors which affect future electricity consumption are grow ing in number and changing rapidly over time.' Historically, the TVA area has experienced rapid economic growth compared to the Nation Prior to the 1975 recession gross regional product in the TVA area grew approximately one and a half times as fast as gross national product. Likewise, total employment in the Valley increased much faster than total em- ployment in the United States with much of this growth occurring in manu- facturing industries within the Valley. The rapid historical growth of the TVA area economy has helped close the gap between incomes in the TVA area and the Nation In 1977 TVA area income pci capita reached 80 percent of U S income per capita Although the Valley has come a long way we expect that the regional economy will continue to outpace the national economy even though at a some what slower pace compared to historical evidence. In the future we expect that much of this growth will occur in the service or commercial industries which reflects underlying structural changes in the regional economy which occurred in the late 1960 s and early 1970 s Although TVA expects the regional economy to grow faster than the national economy, we must realize that there is some uncertainty in forecasting economic growth and other determinants of electricity consumption. In order to proceed on a prudent planning basis, TVA prepares several long-run forecasts tO the year 2000. 1These factors include changes In the level of economic activity, the effect of higher electricity rates, conservation associated with Federal and State legislation, the substi- tution ot electricity for scarce fossil fuels, and the aggressive development of TVA con- servation programs and alternative energy sources such as solar space and water heating PAGENO="0125" 121 FORECASTS OF ECONOMIC DETERMINANTS OF ELECTRICITY CONSUMPTION The basic premise on which TVA load forecasting methodology and procedures are founded is that the demand for electricity is a derived demand determined by the level of economic activity, the price of electricity, the prices and availability of alternative fuels, and conservation and new end-use technology programs de- signed to increase the efficiency by which electricity is used. There is a wide variety of determinants of load growth which PVA. forecasts in order to prepare alternative load forecasts. Rather than presenting all of the determinants of load growth, the key economic factors which influence loads are presented in Exhibit 1. Since there is uncertainty in forecasting any economic factors, a range of forecasts is provided for the key determinants of load growth. One of the major determinants is economic activity. Three forecasts of total TVA area employment are indicated in the top part of Exhibit 1, with the high forecast indicating a growth of approximately 2.3 percent per year from 1980- 2000 and the low economic growth forecast indicating a growth rate of 1.6 percent per year. By the year 2000 there is a 12 percent difference between the high and low forecasts of regional employment. Past and future increases in the price of electricity are also important deter- minants of the increased efficiency in the use of electricity. TVA forecasts the real price of electricity or the price of electricity adjusted to exclude the rate of inflation. The forecast range for the price of electricity varies from a 0 percent change in real price (the price of electricity increasing at the same rate as the inflation rate) to a very high forecast of 4 percent per year. Although a high forecast of electricity prices was prepared, TVA analyses of future revenue requirements indicate that the real price of electricity will increase between 0 and 2 percent per year. TVA's goal is to maintain electricity prices as low as pos- sible although we will encourage conservation through appropriate rate design. As indicated in Exhibit 1 fossil fuel prices as represented by the real price of natural gas are expected to increase faster than the price of electricity. The ris- ing real price of natural gas will tend to cause a substitution of electricity for scarce fossil fuels. A more complete discussion of the forecast of factors which determine load growth is presented in Appendix A. TVA CONSERVATION PROGRAMS Not only do economic factors influence load growth, but conservation programs play a major role in promoting the efficient use of electricity. As Bob Hemphill has discussed, all of the TVA conservation programs are expected to reduce electricity consumption by 15 to 20 billion kWh by 1990 or the equivalent of three to four large generating units. LOAD FORECASTS For each of the major factors determining load growth, a low, medium, and high forecast was prepared; and for TVA conservation programs, a low and high projection are provided. Although a limited number of variations in deter~ minants of load is provided, all possible combinations of these variations in determinants would produce 54 alternative load forecasts. The alternative load forecasts can be organized with a tree diagram as shown in Exhibit 2. There are four types of branches in the tree-one each for the four major determinants of load: economic activity, price of natural gas price of electricity, and TVA conservation programs. For each of the first three factors, there are three alternative levels of activity; and for TVA programs there are two levels of activity. Combinations of various levels of the determinants of electricity consump- tion produce 54 alternative forecasts. For example, high economic activity high price of natural gas or substitution, low price of electricity (0 percent per PAGENO="0126" 122 year), and low TVA program levels would produce the highest forecast and results in a growth rate of electricity consumption of 5.1 percent per year from 1978-1990. The bottom branches of the tree would produce the lowest forecast and would result in a growth rate of electricity consumption of 2.2 percent per year freon 1978-1990. There are, of course, a large number of forecasts between the extremes. Not all of the alternative forecasts are equally likely to occur. It is expected that the mid-range forecasts `between the extreme high and low forecasts have a higher possibility of occurrence. The forecasts of electricity consumption (kilowatt hours) for 1990 and 2000 for selected forecasts which may be likely to occur are presented in Exhibit 3. These alternative forecasts represent a range of forecasts which deals with the uncertainty in load forecasting. In light of this uncertainty, the range of forecasts provides a prudent planning basis. The first forecast presented iii Exhibit 4 is based on the forecasts of the high level of economic activity, the medium outlook for the price of natural gas (medium substitution), the price of electricity increasing no faster than the rate of inflation (0 i)ercent per year), and the high estimate of the effect of `TVA conservation programs. This forecast results in a growth of electricity consumption of 4.6 percent per year from 1978 to 1990 and 3.8 percent per year ~fromn 1990 to 2000. Since the assumption underlying this forecast closely approximately several of TVA's goals, alternative forecasts may seem unnecessary. However, other forecasts must be considered in light of forecasting uncertainty and the need to proceed on a prudent planning basis, recognizing that goals may or may not be achieved. The fourth forecast in Exhibit 3 represents the same assumptions as the first but with total employment being `8 percent lower in 1990 and 12 percent lower in the year 2000 and the effect of TVA conservation programs being slightly less. The growth rate of electricity consumption in the forecast is expected to be 3.7 percent per year from 1978-1990 and 2.8 percent per year from 1990-2000. The second and fifth forecasts are the same as the first and fourth forecasts except that the real price of electricity increases at 2 percent per year rather than 0 percent during the forecast period. Generally, higher prices of electricity reduce the growth rate of electricity consumption 0.5 to 0.8 of a percentage point year year. In 1990 electricity consumption would decrease by approximately 6 percent. A more complete discussion of the alternative load forecasts is presented in Appendix B. EXHIBIT 1 FORECASTS OF DETERMINANTS OF LOAD GROWTH Low Medium High Total regional employment (thousands): 1978 1980 - 1990 2000 Growth rate: 1980-2000 (percent) - Price of electricity (mills per kilowatt-hour in constant 1972 dollars): 1978 1980 1990 2000 Growth rate: 1980-2000 (percent) Residential price of natural gas (1972 dollars per thousand cubic feet): 1978 1980 1990 - 2000 Growth rate: 1980-2000 (percent) 2,588 2,708 3,214 3,730 1.6 13.8 14.9 14.9 14.9 0 1.21 1.49 1.78 2.17 1. 9 2,588 2708 3,311 3,972 1.9 13.8 15.2 18.2 21.8 1.8 1.21 1.49 2.16 3.17 3.9 2,588 2 708 3477 4,261 2.3 13.8 15.2 22.5 33.3 4.0 1.21 1.49 2.62 4.69 5.9 Source: Projections of price of gas through 1990 are based on Data Resources Inc. "Autumn 1978 Energy Review." PAGENO="0127" 123 CoNsuMPTIoN EXHIBIT 2 HATE LOAD FORECASTS Alternative Considerations: Economic Price of Activity Natural Gas Price of Electricity TVA Conservation Programs EXHIBIT 3 ALTERNATE LOAD FORECASTS-NET SYSTEM REQUIREMENTS Billi9ns of kilowatt-hours Average annual growth rate1 1990 2000 1978-90 1990-2000 1. High economic growth, medium substitution, 0 percent change in electricity price, high effect of conservation programs 210. 1 306. 0 4. 6 3. 8 2. High economic growth, medium substitution, 2 percent change in electricity price, high effect of conservation programs 197.4 265.3 4.1 3.0 3. Medium economic growth, medium sUbstitution, 0 percent change in electricity price, high effect of conservation programs - 192. 0 263. 7 3. 9 3. 2 4. Low economic growth, medium substitution, 0 percent change in electricity price, low effect of conservation programs 188. 0 247. 6 3. 7 2. 8 5. Low economic growth, medium substitutisn, 2 percent change in electricity price, low effect of conservation programs 177. 1 216. 7 3. 2 2. 0 1 Fiscal 1978 net system requirements are 121,800,000,000 kilowatt-hours. APPENDIX A-FORECASTS OF MAJOR DETERMINANTS OF ELECTRICITY SHORT-TERM ECONOMIC OIJTLOOK NationaZ economy The growth of the nr~tiona1 economy is expected to slow in the next two ~ ears as rising prices and interest rates dampen expenditures by businesses and l~ouse- holds. Consumer expenditures are expected to increase moderately, whereas in- PAGENO="0128" 124 vestment expenditures are expected to decrease due to a recession in the housing industry. Our current short-term outlook for gross national product (GNP), the major * components of expenditures on goods and services, and total employment in the U.S. are presented in Table 1. Under this forecast, GNP is expected to increase 2.6 percent in 1979 and 1.4 percent in 1980. This implies a slowdown in the rate of economic expansion in 1979 and 1980. While growth will be quite slow with some sectors declining, the overall econ- omy is not expected to experience a recession, although such a possibility exists. In our view, any recession which may develop will be mild and of short duration. Total employment in the U.S. is expected to increase 2.5 percent in 1979 and 1.7 percent in 1980 compared to total employment growth of 4.1 percent in 1978. It should be noted that total employment is expected to increase at about the same rate as GNP which follows recent short-term trends of very sluggish growth in labor productivity. TABLE 1.-SHORT-TERM U.S. ECONOMIC OUTLOOK Gross nation al product and corn ponents (billions of 1 972 dollars) Total employment (millions) Gross national product Consumer expenditures Investment expenditures Government expenditures Percent Percent Percent Percent Percent Year Amount change Amount change Amount change Amount change Amount change 1977 1, 332. 6 857.7 196. 3 269.2 90. 55 1978 1, 384. 2 3.9 888. 3 3. 6 210. 2 7. 1 275.3 2. 2 94.27 4. 1 1979 1, 420. 6 2.6 913.7 2.9 199.8 -5. 0 283.8 3. 1 96.59 2.5 1980 1, 440.4 1. 4 930.6 1.8 188.8 -5.5 291.4 2.7 98. 19 1.7 Source: Wharton Econometric Forecasting Associates, Short-Term Forecast, November 1978. Regional economy The short-term outlook for the regional economy largely reflects the outlook for the U.S. economy as indicated in Table 2. Total employment is expected to increase 2.4 percent in 1979 and 2.2 percent in 1980 compared to 3.5 percent in 1978. In the regional economy, nonmanufacturing employment is expected to increase faster than manufacturing employment reflecting recent historical trends. Alternative short-term outlook An alternative to a GNP growth deceleration in both 1979 and 1980 is that a mild recession could occur in 1979 with recovery occurring quickly in 1980. Two or three quarters of negative growth of real GNP implied in this alternative outlook would represent a mild recession with overall growth of GNP being 1 percent in 1979 and a mild recovery of 3 percent in 1980. A recession in 1979 would change the national and regional outlook as outlined in Table 3. In the United States the percent change in real GNP and total employment would be approximately the same indicating little change in overall labor produc- tivity. In the region, total employment would change in a pattern similar to the Nation. Manufacturing employment would decline in 1979 with recovery in the following year. Nonmanufacturing employment would show little change. TABLE 2.-TVA REGIONAL EMPLOYMENT OUTLOOK [In thousandsj Total employment Manufacturing employment Commercial and other employment Percent Percent Percent Year Number change Number change Number change 1977 2, 499. 8 756. 7 1, 743. 1 19781 2, 588. 0 3. 5 775.0 2. 4 1, 813. 0 4. 0 19792 2, 649. 4 2.4 791. 3 2. 1 1, 858. 1 2. 5 19802 2, 707.6 2.2 803.9 1.6 1,903.7 2.4 I Estimated employment in 1978. ~Forecast employment based on Division of Navigation Development and Regional Studies forecast of Nov. 22, 1978. PAGENO="0129" 125 TABLE 3.-NATIONAL AND REGIONAL ECONOMIC OUTLOOK WITH A RECESSION IN 1979 Year National outlook growth rates of- Regional outlook growth ra - tes of- ~- Nonmanufac- - Total Real GNP employment Total Manafactqring employment employment turing employmentt 1978 1979 1980 3. 9 4. 1 1.0 1.0 3.0 3.0 3. 5 2. 4 .9 -2.6 3.7 6.4 4. 0 2.4 2.6 LONG-TERM ECONOMIC OUTLOOK Nationa' economy As in last year's forecast, the long-term outlook continues to reflect several factors affecting emplOyment, productivity, and output growth. The decline in the growth rates of population continues to decrease the growth in the labor force, although this is partially offset by increased participation of women in the labor force. The current dampening of over-all productivity growth is partially due to the substantial number of new entrants to the labor force in the 16- to 24-year age group. Traditionally, this age group exhibits lower average pro- ductivity than the older, more experienced workers. As this large bulk of younger workers gains employment experience, improvements in productivity are ex- pected to occur in the mid to later 1980's. The long-term forecast also indicates that employment in service-oriented industries will increase faster than in manufacturing industries. The long-term outlook for GNP, employment, and real per capita income is presented in Table 4. The average annual growth rate of GNP from 1980 to 2000 is approximately 3.0 percent. Growth in total employment declines from 1.4 percent per year from 1980 to 1990 to 1.1 percent from 1990 to 2000, reflecting the slower growth of the l.abor force. Nonmanufacturing employment increases at a faster rate than manu- facturing employment, where nonmanufacturing employment as a percent of total employment increases from 79 percent in 1980 to 82 percent in 2000. Growth of real per capita income reflects a pattern similar to the growth of real GNP. TABLE 4.-LONG-TERM U.S. ECONOMIC OUTLOOK, SELECTED YEARS Gross national product (billions Employment (millions) of constant ~ Real per capita dollars) Total Manufacturing Nonmanufacturi ng personal income Percent Percent Percent Percent Percent 1 Year Amount change 1 Number change 1 Number change 1 Number change' change 1980 1,440 98.2 20.8 77.4 4,033 19852 1, 683 3. 2 106. 2 1. 6 21. 5 0. 7 84. 7 1. 8 4, 517 2. 3 1990~ 1,921 2.7 112.6 1.2 21.6 .1 91.0 1.5 4,923 1.6 2000~ 2, 574 3. 0 125. 0 1. 1 22. 3 . 3 102. 7 1. 2 6, 107 2. 2 I Average annual percent change for periods indicated. 2 Forecast based on Wharton Econometric Forecasting Associates long-term forecast of September 1978. 3 Forecast based on Wharton Econometric Forecasting Associates long-term forecast extended to 2000 of July 1978. TABLE 5.-LONG-TERM REGIONAL ECONOMIC OUTLOOK Employment (thousands) Real per Total Manufacturing Nonmanufacturing capita income Percent Percent Percent Percent Amount change Year Number change Number change Number change 1980 2 708 804 1 904 3 307 1985 3, 013 2.2 862 1.4 2, 151 2.5 3,817 2.9 1990 3, 311 1.9 901 .9 2, 410 2. 3 4, 283 2. 3 2000 3, 972 1. 8 1, 005 1. 1 2, 967 2. 1 5, 618 2. 8 1 Forecast based on Division of Navigation Development and Regional Studies forecast of Nov 22 1978 4t5_720_79-__9 PAGENO="0130" 126 Regional economy The growth history of the regional economy indicates a strong growth poten- tial in total employment. In our current forecast, total employment as shown in Table 5 will increase 2 percent per year from 1980 to 2000 compared to 1.2 percent in the Nation. Faster regional economic growth compared to the Nation reflects historical trends in the growth of total employment. From 1955 to 1977, U.S. total nonagricultural employment increased 2.1 percent per year compared to a 3.2 percent-per-year increase in TVA area total nonagricultural employment. The major difference in this year's regional economic outlook and last year's outlook is in the composition of employment growth between manufacturing and nonmanufacturing sectors Last year s regional economic outlook mdicated that manufacturing employment as a percent of total employment would remain fairly stable although an alternative regional outlook examined the potential for a decline in manufacturing employment as a percent of total employment. In the development of this year's regional economic outlook, an extensive examination was undertaken of the factors which are likely to determine the growth of the manufacturing sector of the regional economy compared to the Nation. From. this examination, it was determined that relative wages and rela- tive power costs for the region compared to the Nation were the Important determinants of industrial location. In the regional forecast, wage rates in the region as a percent of U.S. wage rates increase from 79 percent in 1980 to 90 percent in 2000. Power costs in the region as a percent of national power costs increase from approximately 75 percent in 1980 to 90 percent in 2000. The in- creases in relative wage rates and power costs tend to decrease the growth poten- tial for manufacturing in the region. In addition to the examination of the manufacturing sector, the long-term trends in the growth of nonmanfacturing employment as a percent of total em- ployment were reviewed. Prior to 1967, manufacturing employment as a percent of total employment increased. From 1967 to 1977, manufacturing employment a:s a percent of total employment declined from approximately 35 percent to 30 percent As indicated in Table 5 nonmanufacturing employment mcreases at a faster rate than manufacturing employment. From 1980 to 2000, manufacturing employment as a percent of total employment is projected to decrease from 30 percent to 25 percent. Throughout the forecast period, the regional composition of employment approaches that of the Nation. The growth of real income per capita. reflects the increase in relative wages and historical trends of regional per capita income. TVA area per capita income as a percent of U.S. per capita income is 82 percent in 1980 and 92 percent in the year 2000. Alternative regional outlook In addition to the regional forecast described above, two alternative regional forecasts were prepared for use in planning studies The first of these continues the historical pattern of expansion by assuming that relative wages remain con- stant throughout the planning period. This results in manufacturing employment levels that are 17 percent higher by the year 2000 and somewhat smaller increases in total employment and population. A second alternative considers the implica- tions of lower employment growth in the region. The lower forecast would result if regional wages and power costs were the same as the Nation in the year 2000. A comparison of the expected total employment in all three alternative regional economic forecasts is presented in Table 6. TABLE 6.-ALTERNATIVE REGIONAL ECONOMIC FORECASTS, TOTAL EMPLOYMENT [In thousandsi Medium Low High economic Percent economic Percent economic Percent Year growth change growth change growth change 1980 2 708 2 708 2 708 1990 3,311 2.0 3,214 1.7 3,477 . 2.5 2000 3, 972 1.8 3,730 1.5 4,261 2. 1 OUTLOOK FOR THE PRICE OF ELECTRICITY The most important change in assumptionS from the July 1978 load forecasts is in the outlook for the price of electricity PAGENO="0131" 127 In the July 1978 load forecasts, the real price of electricity was unchanged in real terms from 1978 to 1990 as indicated in Table 7. In the July 178 load forecasts, the real price of electricity increased slightly in 1978 and 1979 and then declined in real terms through 1986-1987 and then increased slightly in real terms from 1987 to 1990. The revised outlook for prices is ahown for three alternatives-low, medium, and high-4n Table 7~ All three alternative forecasts are substantially higher than the July 1978 forecast in the short run. In the long run, the low forecast indicates no change in the real price of electricity from 1980 through 2000. The medium forecast indicates a 2~percent-per-year increase in the real price of electricity; whereas, the high forecast indicates a 4-percent-per-year increase in the price of electricity. After an examination of the assu:mptions which underlie the electricity price forecast, it is believed that the low to medium price forecast is more likely than the high forecast. A comparison of the price of electricity outlook used in the July 1978 forecasth and the current alternative price forecasts is presented in Figure 1. TABLE 7.-OUTLOOK FOR PRICE OF ELECTRICITY REVENUE REQUIREMENTS (MILLS PER KILOWATTHOUR) [1972 dollarsl July 1978 Year load forecast Percent change' Revised forecast Percent Low change1 Medium Percent Percent change 1 High change' 1977 11.9 11.9 11.9 11.9 1978 13. 1 10. 1 13. 8 16. 0 13. 8 16. 0 13. 8 16. 0 1979 13. 6 3. 8 15. 2 10. 0 15. 2 10. 0 15. 2 10. 0 1980 - 13. 1 -3. 7 14. 9 -2. 0 15. 2 0 15. 2 0 1990 12. 9 -. 2 14.9 0 18. 2 1. 8 22. 5 4. 0 2000 12. 9 0 14. 9 0 21. 8 1. 8 33. 3 4. 0 `Average annual percent change for period indicated. Figure 1 ALTEENATE LOAD FORECA Alternative Considerations: Price of Price of ~VA Conservation Natural Gas Electricity Programs Economic Activity PAGENO="0132" 128 OUTLOOK FOR PRICE OF NATURAL GAS The recent National Energy Act includes a provision for the deregulation of natural gas by 1985 with substantial increases in the ceiling price from 197& through 1980. The outlook for the residential, commercial, and industrial price of natural gas is presented in Table 8. The reference case forecast is based on the Data Re- sources, Inc., energy review of autumn 1978. These forecasts are derived from a U.S. energy model which accounts for the interaction of the supply and demand for alternative fuels. The reference case forecast indicates that the real price of natural gas will increase substantially in the short run. The real price of natural gas to com- mercial and industrial customers will increase 35 percent between 1978 and 1980. In the long run, natural gas prices will increase approximately 4 percent per year in real terms in both the residential sector and in the commercial and `industrial sector. A low and a high forecast which bounds the reference case was also prepared. The results for the commercial and industrial price of natural gas are presented in Table 8. Beyond 1980 real natural gas prices are increasing approximately 2 percent per year in the low case and 6 percent per year in the high case. TABLE 8.-OUTLOOK FOR PRICE OF NATURAL GAS [1972 doll ars per thous and cubic feeti Referen Ce case' Low Commercial High Commercial Commercial Percent and Percent and Percent and Percent Year Residential change2 industrial change2 industrial change2 industrial change2 1978 1.21 1.09 1.09 1.09 1979 1. 39 14. 5 1.33 22.0 1.33 22.0 1. 33 22. 0 1980 ..__~. 1.49 7.5 1.47 10.5 1.47 10.5 1.47 10.5 1990 - 2.16 4.2 2.10 3.6 1.73 1.6 2.54 5.6 2000 3. 17 4. 0 3. 12 4. 0 2. 12 2. 0 4.57 6. 0 1 Data Resources, Inc., Autumn 1978 Energy Review, East South Central I, Kentucky and Tennessee. 2 Average annual percent change for period shown. TVA CONSERVATION PROGRAMS There is a wide variety of TVA programs currently underway or soon to be underway which will achieve a substantial amount of conservation. Since the July 1978 load forecasts were completed, a substantial effort has been put forth in obtaining estimates of the potential for PYA energy programs. The programs, the assumed penetration, and the resulting energy saving in 1990 are presented in Table 9. The conservation programs are expected to result in an electricity saving in 1990 of 14.5 to 20.0 billion kWh. PAGENO="0133" 129 TABLE 9.-TVA CONSERVATION PROGRAMS [In millions of kilowatt-hoursl 1990 energy Assumed penetration savings A. Residential: 1. Retrofit programs-Home insulation programs__ 43,000 homes per year-8 yr 3, 100 2. New home programs-super $aver home pro- gram - 36,000 homes per year 2. 100 3. Residential heating equipment: a. Heat pumps: (1) Low estimate 20,000 per year or 222,000 in 1990 800 (2) High estimate 55,000 per year or 628,000 in 1990 - 2, 200 b. Biomass: (1) Low estimate 31,000 homes in 1990 170 (2) High estimate 94,000 homes in 1990 500 C. Solar active sytem-retrofit: (1) Low estimate 2,800 units in 1990 20 (2) High estimate 28,400 units in 1990 180 4. Solar water heating: Low estimate 53,000 units in 1990 150 High estimate 163,000 units in 1990 500 5. Passive solar homes-new homes: Low estimate 11,600 units in 1990 70 High estimate - 23,200 units in 1990 140 6. Electrified transportation 200,000 vehicles in 1990 -1, 400 Total, residential energy savings 5,000-7,300 B. Commercial and industrial: 1. Solar: Low estimate 10-percent penetration 600 High estimate 20-percent penetration 1, 200 2. Biomass: Low estimate 2-percent penetration 400 High estimate 3-percent penetration 600 3. Commerical and industrial energy audit program 6, 300 4. Cogeneration: Low estimate Moderate national and TVA financing incen- tives. 2, 200 High estimate 30-percent tax credit TVA loans 4, 600 Total commercial and industrial energy savings 9, 500-12, 700 Total energy savings APPENDIX B-LOAD FORECASTS The July 1978 load forecasts explored the impact on electricity consumption of TVA conservation programs and the development of new end-use technologies. Revisions to the July 1978 forecasts have included several changes: (1) an im- proved regional economic outlook, (2) changes in the outlook for electricity prices, (3) changes in the estimates of TVA conservation and new technology programs based on estimates of the potential effect provided by those responsible for the programs, (4) an examination of a wider variety of changes in load due PAGENO="0134" 130 to economic and noneconomic factors, and (5) changes in the peak and hourly load forecast based on an analysis of individual residential conservation pro. grams. COMPARISON OF FEBRUARY 1979 AND JULY 1978 LOAD FORECASTS A comparison of the July 1978 and February 1979 forecasts is presented in Tables 1 and 2. In Table 1, a comparison of forecasts of net system requirements is presented based on the Medium Economic Growth-Expanded Conservation forecast for 1990. The top line indicates the net system requirements based solely on economic and demographic factors. The February 1979 forecast is based on the medium regional economic forecast excluding the shift to services industries. TABLE 1.-COMPARISON OF FORECASTS 1990-MEDiUM ECONOMIC GROWTH-EXPANDED CONSERVATION [In billions of dollarsj July 1978 Revised forecast forecast' February 1979 Factors influencing change Economic growth and demographic factors 250.3 244.2 Conservation: Price 17.5 -436 National programs -5.2 -2.0 TVA programs: Home insulation programs -2.0 3.4 Super Saver home program -2.3 Heat pump (-3.2) -2.4 C. & I. energy audits -5.9 5.9 Low-interest loans-heat pump 0 +.3 Substitution +14.4 +14.7 Medium economic growth-expanded conservation 230.9 199.6 1 For a further discussion of the July 1978 load forecasts, see `July 1978 Load Forecasts," Analysis Branch, Tennessee Valley Authority, 1978. TABLE 2.-COMPARISON OF FORECASTS 1990-MEDIUM ECONOMIC GROWTH-NEW END-USE TECHNOLOGIES [In billions of kilowatt-hoursl July 1978 Revised forecast Factors influencing change forecast' February 1979 Medium economic growth-expandedconservation 230.9 199.6 Shift to services -8.8 -8.3 New end-use technologies: Solar -4 ~ -2 2 Cogeneration 4 0 5 0 Monetary incentives 7 1 3 9 Appliance efficiency -3.0 0 Biomass 0 -1.2 Electric car +1 ~ +1 5 Substitution +11 1 +3 3 Medium economic growth-new end-use technologies 215.8 183.8 `See "July 1978 Load Forecasts," Analysis Branch, Tennessee Valley Authority, 1978. The February 1979 forecast, based solely on economic and demographic factors, is approximately 6 billion kWh or 2.4 percent lower than the July 1978 forecast due to: a downward revision in the outlook for directly served industry, a lower economic outlook in the short run, and a revision in the projection of residential customers. The largest change In the forecast is due to the outlook for the price of elec- tricity. The outlook for prices In the July 1978 forecast indicated a constant real price from 1977 through 2000. The outlook for electricity prices which is in- cluded in Table 1 for the February 1979 load review indicates substantial in- creases in the real price of eelctricity for 1979 and approximately a 2-percent- per-year increase from 1980 to 2000. The increases in price reduced the forecast for 1990 by 26 billion kWh. There are some revisions In the 1979 estimates of TVA conservation programs reflecting expansion of the home insuitation program and acceleration of the $upet ~aver home and heat pump programs. PAGENO="0135" 131 The overall decrease in net system requirements is approximately 31 billion kWh of which increases in the price of electricity account for 85 percent of the change in electricity consumption. In `Table 2 a comparison of the forecasts on the basis of the Medium Economic Growth-New End-Use Technologies forecast is presented. Overall, there have been some downward revisions In the effect of some TVA programs and a reduc- tion in the substitution of electricity for scarce fossil fuels since a lower fore- cast of natural gas prices was utilized as an alternative in the February 1979 forecast. The difference In net system requirements is approximately 32 billion kWh, again largely reflecting increases in the price of electricity. REVISED LOAD FORECASTS Electric Energy Forecc&sts.-A range of alternative forecasts of factors such as economic activity, the price of electricity, the price of natural gas, and TVA conservation programs provides the basis for determining a range of electricity forecasts. For each of the major factors determining load growth, a low, medium or ref- erence, and high forecast were prepared; and for the TVA conservation pro- grams, a low and high projection are provided. Although a limited number of vari- ations in determinants of load is provided, all possible combinations of these vari- ations in determinants would produce a large number of alternative load fore- casts. The alternative load forecasts can be organized with a tree diagram as shown in Fgure 1. There are four alternative types of branches in the tree-one each for the four determinants of load: economic activity, price of natural gas, price of electricity, and TVA programs. For each of the first three factors, there are three alternative levels of activity; and for TVA programs, there are two levels of activity. 33 - 32 31 30 29 25 27 ~ 26 - 25 ~i 2~ ~ 23 22 21 20 .~ 19 17 16 15 1~' 13 12 11 ~ , ,` t Pig.~e 1 OUTL00~( POR PRICE 0? ELECTOICIT? REVENIJE REquIRu1EN~rS (MILLs PEN 1972 DOLLENS 1977 713 79 8o ` 85 90 95 2000 Year 1 1 PAGENO="0136" 132 Combinations of various levels of the determinants of electricity consump- tion produce alternative forecasts. For example, high economic activity, high price of natural gas or substitution, low price of electricity (0 percent per year), and low TVA program levels would produce the highest forecast; whereas, the bottom branches of the tree would produce the lowest forecast. The percentages on the top of each branch of the tree represent the average annual growth rate from 1980 to 2000 of the determinants of electricity consumption. For example, the reference case growth rate for economic activity (total regional employ- ment) is 1.9 percent per year with a high forecast of 2.3 percent per year and a low forecast of 1.6 percent per year. Rather than presenting all of the alternative forecasts, seven selected fore- casts of net system requirements for 1990 are presented In Table 3. For corn- `parison purposes, the forecasts prepared in July 1978 are also shown. The forecasts are lower due to the upward revisions in the outlook for price of electricity. In 1990 there is a wide range of forecasts from an extreme low of 158.7 billion kWh to an extreme high of 219.9 billion kWh with growth rates of 2.2 to 5.1 percent per year, respectively. Excluding the DOE loads, the growth rates range from 1.0 to 4.5 percent per year. In the middle range forecasts, the growth rates including the DOE loads range from 3.2 to 4.6 percent. Within the middle range of forecasts, one of the more likely forecasts is based on projections of a high level of economic activity, medium outlook for the price of natural gas (medium substitution), the price of electricity increasing no faster than the rate of inflation (0 percent per year), and the high estimate of the effect of TVA conservation programs. This forecast (labeled No. 2 in Table ~3) results in a growth of electricity consumption of 4.6 percent per year from 1978 to 2000 including the DOE loads. TABLE 3.-ALTERNATIVE LOAD FORECASTS; NET SYSTEM REQUIREMENTS 1990 . ` Billions of kilo- watthours Average annual growth rate,' 1978~0(p&ce~) Includes DOE Excludes DOE HIGH FORECAST 1. High economic growth, high substitution, 0 percent change in electricity priče, low TVA programs - 219. 9 : 5. 1 4. 5 MIDDLE RANGE FORECASTS ~. High economic growth, medium substitution, 0 percent change in elec- tricity price, high TVA programs 3. High economic growth, medium substitution, 2 percent change in elec- tricityprice,hi~hTVAprograms 4. Medium economic growth, medium substitution, 0 percent change in electricity price, high TVA programs - 5. Low economic growth, medium substitution, 0 percent change in elec- tricityprice,lowTVAprograms 6. Low economic growth, medium substitution, 2 percent change in elec- tricity price, low TVA programs 210.1 197.4 192.0 188.0 177. 1 . 4.6 4.1 4.1 3.4 3.9 3.1 ~ 3.7 2.9 3.2 2.2 LOW FORECAST : 7. Low economic growth,~ low substitution, 4 percent change in electri- ~ city price, high TVA programs 158. 7 2. 2 1.0 JULY 1978 FORECASTS ` .. Medium economic growth-expanded conservation Medium economic growth-new end-use technologies 239.6 215. 4 5. 5 5.0 4. 9 . :~- 3 1 Fiscal 1978 net system requirements are 121,800,000,000 kilowatthours. DOE requirements are 15,600,000,000'kilowatt hours. - The fifth forecast in Table 3 represents the came assumptions as the first but with total employnient.being 8 percent lower in ~99O and 12 percent-lower in the year 2000 and the effect of TVA conservation p~ograms beingslightly. less. The growth rate of electricity consumption ~n the forecast is expected to be 3.7 perce:nt per yeor from 1978-4990. ` - PAGENO="0137" 133 The third and sixth forecasts are the same as the second and fifth forecasts except that the real price of electricity increases at 2 percent per year rather than zero percent during the forecast period. Generally, higher prices of electricity reduce the growth rate of electricity consumption 0.5 to 0.8 of a percentage point per year. In 1990, electricity consumption would decrease by approximately 6 percent. The forecast of net system requirements for the year 2000 is presented in Table 4. These forecasts indicate a range of growth rates from 1990 to 2000 of 0.6 to 4.1 percent per year. Excluding the DOE loads, the growth rates rang~ from 0.8 to 4.8 percent per year. For the middle range forecasts, the growth rates range from 2.0 percent to 3.8 percent. All of the growth rates from 1990 to 2000 are lower compared to 1078 to 1990 largely due to the zero growth of the Department of Energy uranium enrichment loads from 185 to 2000. Excluding the DOE loads, the growth rates from~ 1978 to 1990 are lower than the growth rates from 1990 to 2000 due to the rapid buildup of TVA conservation programs in the early years of the forecast period. TABLE 4.-ALTERNATIVE LOAD FORECASTS; NET SYSTEM REQUIREMENTS 2000 Average annual growth rate, 1990-2000 (percent) Billions of - kilowatt-hours Includes DOE ExclUdes DOE HIGH FORECAST 1. High economic growth, high substitution, 0 percent change in elec- tricity price, low TVA programs 328. 8 4. 1 4. 8 MIDDLE RANGE FORECASTS 2. High economic growth, medium substitution, 0 percent change in electricity price, high TVA programs 306. 0 3. 8 4. 5 3. High economic growth, medium substitution, 2 percent change in electricity price, high TVA programs 265.3 3.0 3.6 4. Medium economic growth, medium substitution, 0 percent change is electricity price, high TVA programs 263.7 3.2 3.9 5. Low economic growth, medium substitution, 0 percent change in electricity price, low TVA programs 247. 6 2. 8 3. 4 6. Low economic growth, medium substitution, 2 percent change in electricity price, low TVA programs 216. 7 2. 0 2. 6 LOW FORECAST 7. Low economic growth, low substitution, 4 percent change in elec. tricity price, high TVA programs 169.2 .6 .8 JULY 1978 FORECASTS Medium economic growth-expanded conservation 311. 9 3. 1 3. 6 Medium economic growth-new end-use technologies 277. 5 2. 6 3. 1 A graph of several alternative load forecasts compared to the July 1978 Medium EcOnomic Growth-New End~Use Technologies forecast (forecast 6) is presented in Figure 2. Forecast 1 represents the extremely high forecast, and forecast 5 represents the extremely low forecast. Forecasts 2, 3, and 4 represent the middle range forecasts, with forecast 2 representing high economic growth, medium substitution, 0-percent change in electricity prices, and the high esti- mate of TVA programs. From 1980 to 1986, all of the forecasts are below the July 1978 forecast. This is due to the lower short-term economic outlook, increased prices of electricity, and the rapid buildup of PVA conservation pro- grams, especially the home weatherization program and the commercial and industrial program. Beyond 1986, the July 1978 forecast is in the upper range of the revised alternative forecasts. Winter peak requirements forecast The forecasts of winter peak requirements for 1990 are shown in Table 5. In the July 1978 new end-use technologies forecast, the 190 winter require-. ments were 38,100 MW. The revised forecasts indicate a range of winter peak requirements of 24,700 MW to 36200 MW. Comparing the July 1978 new end-use technologies forecast of 38,100 MW with the high economic growth, medium PAGENO="0138" 134 :sifbstitution, 0-percent change in price, high TVA programs forecast of 33,900 TMW indicates a decrease of 4,000 MW. The increased growth of prices from zero percent per year to 2 percent per year accounts for a decrease in winter peak load of approximately 2,000 MW. 330 320 310 300 290 280 270 260 ~ 250 ~ 2k0 ° 230 ~ 220 1 210 ~ 200 190 180 170 i6o 150 1~0 130 120 1980 Year TABLE 5.-ALTERNATIVE LOAD FORECASTS; NET SYSTE M PEAK REQ UIREMENTS 1990 Average annual growth rate,1 1978-90 (percent) Includes Excludes Megawatts DOE DOE HIGH FORECAST :1. High economic growth, high substitution, 0 percent change in ecel- tricity price, low TVA programs - 36, 200 4.4 4.3 MIDDLE RANGE FORECAST :2. High economic growth, medium substitution, 0 percent change in elec- tricity price, high TVA programs - 3. High economic growth, medium substitution, 2 percent change in elec- tricity price, high TVA programs 4. Medium economic growth, medium substitution, 0 percent change in electricity price, high TVA programs - 5. Low economic growth, medium substitution, 0 percent change in elec- tricity price, low TVA programs S. Low economic growth, medium substitution, 2 percent change in elec- tricity price, low TVA programs - 33, 900 31,700 30, 800 30,900 29, 050 3.9 3.6 3.3 3.0 3.0 2.7 3.1 2.7 2.5 2. 1 LOW FORECAST 7. Low economic growth, substitution, 4 percent change in electric- ity price, high TVA programs 24,700 1.2 .4 JULY 1978 FORECASTS Medium economic growth-expanded conservation Medium economic growth-new end-use technologies 39, 900 38,100 5.3 5. 3 4.9 4 8 NET sYsTEl4 REQUINPINETS ALTERNATIVE ENERGY FORECASTS Economic Price of TVA Growth Substitution Electricity Progrszns 1 2 3 5 6 0% 0 0 2 Is High High Low High Medium High Medium Medium High Low Medium Low Low Low High July 1978 Medium Economic Growth--New End-Use Technologies 1 .2 .6 .3 `5 1985 1990 1995 - 2000 1 January 1978 net system requirements are 21,517 megawatts. DOE requirements are 2,346 megawatts. PAGENO="0139" 135 The forecast winter peak loads in the year 2000 are presented in Table 6. The revised forecast winter peak loads range from 26,700 MW `to 56,100 MW. A comparison of the growth rates of winter peak load (Table 5) and the net system energy requirements (Table 3) for 1978 to 1990 indicates lower rates of growth for peak loads than for energy. The difference in growth rates ranges from 0.5 to 1.0 percent per year and increases the lower the load forecast. The slower growth rates of peaks than energy are due to the rapid increase in TVA conservation programs in the early years of the forecast. From 1990 to 2000 the peak loads are increasing at approximately the same rate as energy. This is due to a leveling off- of the growth of the TVA conservation programs and the con~ stant level of DOD loads which causes a slight decline in the overall system load factor. TABLE 6.-ALTERNATIVE LOAD FORECASTS; NET SYSTEM PEAK REQUIREMENTS 2000 Megawatts Average annual growth rate, 1990-2000 (percent) Includes Excludes DOE DOE HIGH FORECAST 1. High economic growth, high substitution, 0 percent change in electricity price, low TVA programs - 56, 100 4.5 5.0 MIDDLE RANGE FORECASTS 2. High economic growth medium substitution, 2 percent change in in electricity rrice, high TVA programs 3. High economic growth, medium substitution, 2 percent change in electricity price, high TVA programs 4. Medium economic growth, medium substitution, 0 percent change in electricity price, high TVA programs 5. Low economic growth, medium substitution, 0 percent change in electricity price, low TVA programs 6. Low economic growth, medium substitution, 2 percent change in electricity price, low TVA programs 50, 650 43, 500 43, 150 41, 850 36, 350 4.1 4.6 3.2 3.6 3.4 3.9 3. 1 3. 5 2. 3 2.6 LOW FORECASTS 7. Low economic growth, low substitution, 4 percent in electricity price, high TVA programs 26, 700 .8 .9 JULY 1978 FORECASTS Medium economic growth-expanded conservation Medium economic growth-new end-use technologies 54, 000 51, 000 3. 1 3. 4 3. 0 3. 3 PAGENO="0140" PAGENO="0141" INDEX Alternative power sources: Coal-a viable option Cost-effective solar options Electric energy options of TVA__ Is solar energy an effective source? 12 Methods to decrease electricity consumption 90 Nuclear a disaster from economic standpoint 98 Solar energy, utilization of 6 Solar heating and cooling, initial ~apital deterrent to 12 Solar programs 55 Straight economics killing nu- clear power 101 TVA overemphasizing nuclear__ 101 Application/demonstration models_ 6 Borrowing authority 7, 48, 52, 105 Bankruptcy, increased an invita- tion to 91 Bonded indebted ceiling, removal of 1 Compliance with EPA standards at lowest possible cost 79 Cost of disposition of spent nu- clear fuel 79 Distribution of $15 billion for rrv~ projects 105 Effect of smaller increases in__ 68 Factors affecting 22 $15 billion increase adequate to finance commitments 63 Financial capacity to meet growth needs 63 $15 billion increase, benefits to be derived from 66 Financing increased authority__ 106 Future demand and TVA 26 Increase designed to cover pro- jected inflation - 105 Increase is a necessity~ 54 TVA self-supporting agency__ 54 Borrowing authority-Continued Page Increase to exercise nuclear op- tion 97 Increased provides flexibility__. 64 Inflation's impact on 81 Interest costs on TVA's indebted- ness 106 No public hearings on request to residential consumer 100 Irresponsible financing 94 Is increase necessary ? 2 Long-term forecast used in deter- mining 108 No public hearings on request to raise 102 Provides more flexibility Ratio of income to utility costs~. Relationship to future power de- mand 22 Request for increased justi- fied 24, 28 TVA debt ceiling too high 101 TYA debt out of line with pri- vate utilities 99 TVA financial condition dete- riorating 90 Why increase is needed 61 Congressional oversight of TVA operations 7, 69 Conservation 55, 56, 98 Commercial and industrial pro- gram 58 Electronic control of electric appliances Program to be voluntary Energy supply alternatives Existing and potential TVA pro- grams 60 Heat pump financing plan 58 Home insulation program 57 Insulation programs, potential of 103 Page 98 12 1 50 89 80 80 6 (137) PAGENO="0142" 138 Conservation-Continued Page Price, key factor 40 Program best in Nation 615 Savings, impose surcharge for additional 8 Sensitive to cost `Solar water heating program~ Super saver home program Surcharge, benefits derived from_ Surcharge, compatibility with TVA Act 8 TVA as a leader in 5 TVA's program 109 Wood heating program 59 Construction: Comparative costs of power- plants 46 Cost-benefit analysis, review oL_ 96 Cost overruns 13, 29, 107 Additional borrowing to com- plete projects 14 Environmental stipulations ef- fect on 29 Speed up to prevent 49 Financial risk of nuclear 106 Increasing costs of projects~___ 68 Inflation impact on projects____ 54 Interest rates increase cost of plants 69 Nuclear plant, control cost es- calations in 14 Nuclear plants, cost of 107 Power funds and borrowing au- thority 67 Present adequate for near fu- ture - 5 Recommendations for savings in 107 TVA schedule to meet energy re- quirements 67 Different programs and priorities needed 4 Economic growth, effect on elec- tricity consumption 46 Economic growth in PVA region~ 53, 62,66 Economic impact of TVA on area_. 3 Export of electricity 95 Historic commitment to welfare of valley citizens Nuclear option on coal country~. Economy: Page National and State outlook to 1985 32, 34 Tennessee econometric model__. 3~ Electricity consumption and price projections 31 Annual rate of growth 31 Elasticity of demand for electricity 31 Energy demand and the State's economy 34 Impact of coal on energy prices 32 Interpret with a degree of caution 32 National and State outlook to 1985 32 Tennessee and National econ- omies 30, 3a Per capita income In Tennessee_ 39 Factors affecting 3~ TVA's impact on regional 83 Energy priorities, nationaL Energy problem, solution a political decision 5G EPA/TVA agreement: Administration view of Administration doesn't under- stand problem 77 Settlement cost not challenged 77 Agreement bad settlement 78 Clean air settlement 91 Coal generating facilities strate- gies 7G Economic impact statement ordered on 7~ Fallacy of cost comparison 72 GAO approaches to air pollution control 70 GAO method narrow and ?un proven 72 GAO strategies don't cover all costs 78 Method cheaper than GAO's_ 71 Method more costly than GAO's_ 71 SO2 program constrained by air quality standards 74 TVA estimate of scrubber opera- tion Expansion, future, firm financial base needed for 3 Expansion plans, reevaluation of__ 2: 48 58 58 8 90 Fluidized-bed combustion re- 95 search in PAGENO="0143" 139 Funding, Federal, for TVA ex- ~Page perimentation 11 GAO recommendations, TVA imple- menting 56 GAO study, relevancy of 23, 27 Local autonomy in operation of TVA needed 51 Longwall mining 111 Multiyear budgeting 105 Planning: Broader public input in decision- making 108 Citizens ignored 94 More citizen participation in___. 91 Public participation in 96 Power projections: Alternative load forecasts - 107 Are GAO recommendations out of date? 24, 28 Consumption and price 31 Elasticity of demand 31 Growth, annual rate of 31 Create panel to assist in evalu- ation process - 23, 28 Data base, incomplete, utilities suffer from 11 Data base supporting metho- dologies inadequate 16 Demand and supply 21, 25 Demands, future, in TVA area~ 3 Electricity consumption fore- casts, residential 16 Energy and electricity data base models inadequate 18 Energy use, better data base, es- sential 19 Electricity and natural gas consumption, monitor 19 Federal funding for detailed data on 17 Random sampling of house- holds 19 Forecasts, wider range of needed to develop 16 Future, overestimated 2 Power projections-Continued GAO load forecasts and TVA re- rage spouses, differences in 9 GAO projections and peak de- mand Projections incomplete and in- adequate 10 Impact of smaller family size on_ 47 Importance of accurate 41 Improved forecasting methodolo- gies 19, 20 Industrial and commercial de- mand forecast, GAO and PVA disagree on Load forecasts 18 Oak Ridge National Laboratory State4evel electricity de- mand model 41, 43 Comparisons with other fore- casts 42, 44 Continued growth in TVA's electrical demand 42 Economic and demographic factors influence electricity use 43 Forecasts for TVA service area 41 43 Planning and forecasting, better system needed 5 Planning not limited to single forecast 66 Projection methodology favored over forecasting - 47 Residential electricity consump- tion 18 Supplying demands at minimum costs 21 TVA forecasts not state of the art 15 TVA's activities play active role in shaping future demand~ 18 Power supply: Additional generating capacity questionable 92 Adequate electricity essential to region's 83 Adequate supply essential to the region's future 86 Cogeneration 59, 103, 104, 110 Consumption, effect of price on_. 45 PAGENO="0144" Power supply-Continued Difficulty in forecasting future needs Distributors' stake inadequate-- Electricity, increased use of____ Excess of riectricity increases growth rate of valley 93 Future supply 84, 92 Growth projections need more study 93 Impact of underestimating fu- ture needs 87 In-depth studies needed for pro- viding future 88 Industrial growth dependent on availability of 50 Interruptible contracts, more planned by TVA 111 More efficient appliances costlier to operate 13 Power for future requires plan- fling today 84 Providing requirements for re- gional economy 62 Residential consumption to drop in future 104 Reverse trend ~f increased elec- trification Shortage more costly than over- abundance Power supply-Continued Page Subsidizing power needs of other sections of Nation 92 TVA's distribution of 51 TVA's interchange agreements-- 110 TVA's role in emergency situa- tions 51 Rate pricing: Effect of rate increases on re- gion Incremental pricing 52 Inflation key to power rate increases 61 National ratesetting exempt TVA area from 52 Natural gas in competition with electricity 47 Ratepayer costs of TVA pro- grams 78 TVA committed to low 61,65 Safety requirements, impact of NRC TVA as a national energy demon- 90 stration model 28 84 Variance of capacity cost~~-~_~-.-... 100 1~to `Page 102 85 13 0